Globalisation debt & banking
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“If Qantas knew what was coming down the financial road, they would stop their expansion plans, euthanase Jetstar and focus on conserving every cent of cash they can. Sell the A380 and B787 slots for what they can.”
The same observation could made about the finance industry in Wall Street. ALL banks were involved in dodgy investments and yet despite clear warning signs, NONE of them put the brakes on and queried the logic of what they were doing. As one of the Wall street major players was quoted “we had to keep dancing until the music stopped”.
Its one of the follies of capitalism, the market races toward a cliff at break neck speed and then when the system falls over the edge into recession or depression everybody dusts themselves off and says “holy crap what happened, I didn’t see that coming”.
Some of the most astute analysts the world has to offer are warning of huge currency collapses and defaults but QF has no choice but to continue dancing until the music has stopped.
Although, many would suggest the music has already stopped.
FEMA camps anybody.
The same observation could made about the finance industry in Wall Street. ALL banks were involved in dodgy investments and yet despite clear warning signs, NONE of them put the brakes on and queried the logic of what they were doing. As one of the Wall street major players was quoted “we had to keep dancing until the music stopped”.
Its one of the follies of capitalism, the market races toward a cliff at break neck speed and then when the system falls over the edge into recession or depression everybody dusts themselves off and says “holy crap what happened, I didn’t see that coming”.
Some of the most astute analysts the world has to offer are warning of huge currency collapses and defaults but QF has no choice but to continue dancing until the music has stopped.
Although, many would suggest the music has already stopped.
FEMA camps anybody.
Here We Go Again
Y2K, Peak Oil , Global Warming, End of Days, Islamic Uprising/Holy War, Collapse of the Monetary Sysyem. Who says that human beings love the idea that the world will end during their brief time on the planet. Our view of the world is often confined by our own brief time on it.
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D & M !
Aren't you glad you've taken my advice:-
Bought a Chicken tractor.
Paid off your debt.
Stayed out of gold?
Got your gun licence.
Cashed up.
etc, etc.
Any other ideas?
You'll be taking it somewhere else, if you haven't!
For your own good, start thinking outside of the box.
Bought a Chicken tractor.
Paid off your debt.
Stayed out of gold?
Got your gun licence.
Cashed up.
etc, etc.
Any other ideas?
You'll be taking it somewhere else, if you haven't!
For your own good, start thinking outside of the box.
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A change of tact but still "on theme."
So, some of us here are believers in a change in the next decade in the power base of where wealth will come from. Some have described what's coming as the greatest opportunity for wealth enhancement in generations. How to take advantage? Gold, Silver, now before it gets too expensive if you have spare cash lying around. Property is stagnant. But what about Super? What funds should one invest in for the next few years?
So, some of us here are believers in a change in the next decade in the power base of where wealth will come from. Some have described what's coming as the greatest opportunity for wealth enhancement in generations. How to take advantage? Gold, Silver, now before it gets too expensive if you have spare cash lying around. Property is stagnant. But what about Super? What funds should one invest in for the next few years?
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Good question.
Should you have SMSF, perhaps a small percentage in collectibles?
An asset.
Provided that you have some expertise in the field, will hold some value.
Depends on your interpretation of the looming crisis.
Land is another possibility.
Seriously who knows?
Should you have SMSF, perhaps a small percentage in collectibles?
An asset.
Provided that you have some expertise in the field, will hold some value.
Depends on your interpretation of the looming crisis.
Land is another possibility.
Seriously who knows?
OK. Let us accept the bleeding obvious, that the US and others have been printing money at an unsustainable rate for years, thus devaluing cash, and a global crisis is imminent as a result.
Then why would you get 'cashed up'? Why do you advocate turning to the one thing that is losing its 'value' at a rapid rate as more is produced and the firehoses pour it into the world's monetary system? Surely this looming or imminent crisis should be one of inflation, not deflation? So everything else should be getting more expensive in currency terms - houses and land, gold, silver, oil, food. What has happened in these cases before in these situations, e.g. Germany 1920s, Zimbabwe more recently has been hyperinflation, not deflation.
You all seem to agree with each other that printing money and pumping it into the system is the problem. But then half of you seem to be saying that the solution is to be cashed up, [in other words, invest in the very thing you all agree is losing its value] wait for real estate and other assets to drop 40% and then make a great killing. Comsec filled my order 3% cheaper, that sort of thing. Why are you buying shares at all?
Situational awareness seems reasonable - forward prediction of what consequentially happens next seems like it needs work. Just my 2c.
Then why would you get 'cashed up'? Why do you advocate turning to the one thing that is losing its 'value' at a rapid rate as more is produced and the firehoses pour it into the world's monetary system? Surely this looming or imminent crisis should be one of inflation, not deflation? So everything else should be getting more expensive in currency terms - houses and land, gold, silver, oil, food. What has happened in these cases before in these situations, e.g. Germany 1920s, Zimbabwe more recently has been hyperinflation, not deflation.
You all seem to agree with each other that printing money and pumping it into the system is the problem. But then half of you seem to be saying that the solution is to be cashed up, [in other words, invest in the very thing you all agree is losing its value] wait for real estate and other assets to drop 40% and then make a great killing. Comsec filled my order 3% cheaper, that sort of thing. Why are you buying shares at all?
Situational awareness seems reasonable - forward prediction of what consequentially happens next seems like it needs work. Just my 2c.
Possums, read your Paul Krugman, we are in a liquidity trap, or at least America is.
America is in a deflationary economic situation. When that happens, debt becomes progressively more expensive and jobs are lost. Consumption is curtailed because goods are cheaper the day after tomorrow than they are today. Furthermore, if you are in debt, the value of the asset offsetting the debt declines - this puts peoples house mortgages under water.
This is much worse than inflation unless you are a cashed up millionaire, in which case this suits you perfectly. Go figure.
America is in a deflationary economic situation. When that happens, debt becomes progressively more expensive and jobs are lost. Consumption is curtailed because goods are cheaper the day after tomorrow than they are today. Furthermore, if you are in debt, the value of the asset offsetting the debt declines - this puts peoples house mortgages under water.
This is much worse than inflation unless you are a cashed up millionaire, in which case this suits you perfectly. Go figure.
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thats right sunfish, however, when deflation becomes the norm, inflation will be caused by "stimulus" from central banks etc and then whammy, hyper inflation if we are not careful.
Everyone thinks America is separate in its economic challenges, which is false, it as the reserve currency affects all parts of the world using USD..... except Libya and look what happened to them and many others like Libya. The most obvious thing is commodity prices, as they are priced in USD, so when it hyper inflates/weakens then we all must pay more for the product and this is offset in a minor way by exchange rates and small other factors.
So as they play with matches in a tinderbox for a house, we all will burn.; Thats the nature of a fiat currency when it is not backed by physical assets.
Everyone thinks America is separate in its economic challenges, which is false, it as the reserve currency affects all parts of the world using USD..... except Libya and look what happened to them and many others like Libya. The most obvious thing is commodity prices, as they are priced in USD, so when it hyper inflates/weakens then we all must pay more for the product and this is offset in a minor way by exchange rates and small other factors.
So as they play with matches in a tinderbox for a house, we all will burn.; Thats the nature of a fiat currency when it is not backed by physical assets.
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My Plan
Look for a financial institution that is going to give me around 5.8% for a 12 month term deposit on $X00k.Liquidate whatever I can and put $Y00k it into an offset account against my small mortgage.Cut my discretionary spending .Review the rents on my investment properties.Look at other ways of reducing my tax.Review my stance on debentures and EFTs.Clear all the bad debt I have:Credit Cards(the Amex is no longer convenient),Store cards etc.
Forward Pay the kids school fees and ask for a consideration of discount for doing so
Interest rates are on the way down.Lock in a decent rate for term deposits now.When rates fall continue to pay the same weekly interest payments on my mortgage
Weather the storm.The rest I have no control over.So I'm not going to sweat it
Forward Pay the kids school fees and ask for a consideration of discount for doing so
Interest rates are on the way down.Lock in a decent rate for term deposits now.When rates fall continue to pay the same weekly interest payments on my mortgage
Weather the storm.The rest I have no control over.So I'm not going to sweat it
Last edited by packrat; 11th Sep 2011 at 05:49.
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The below link is interesting.
Interesting to see a few posters on here now mentioning 'hyper inflation', well the USA has already entered hyper inflation. The final stages of their economic collapse will really speed up in the next few months but the show is over folks, they are done and dusted as with the rest of us.
Interesting to see a few posters on here now mentioning 'hyper inflation', well the USA has already entered hyper inflation. The final stages of their economic collapse will really speed up in the next few months but the show is over folks, they are done and dusted as with the rest of us.
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Look for a financial institution that is going to give me around 5.8% for a 12 month term deposit on $X00k.Liquidate whatever I can and put $Y00k it into an offset account against my small mortgage.Cut my discretionary spending .Review the rents on my investment properties.Look at other ways of reducing my tax.Review my stance on debentures and EFTs.Clear all the bad debt I have:Credit Cards(the Amex is no longer convenient),Store cards etc.
Forward Pay the kids school fees and ask for a consideration of discount for doing so
Interest rates are on the way down.Lock in a decent rate for term deposits now.When rates fall continue to pay the same weekly interest payments on my mortgage
Weather the storm.The rest I have no control over.So I'm not going to sweat it
Forward Pay the kids school fees and ask for a consideration of discount for doing so
Interest rates are on the way down.Lock in a decent rate for term deposits now.When rates fall continue to pay the same weekly interest payments on my mortgage
Weather the storm.The rest I have no control over.So I'm not going to sweat it
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Jibba Jabba. It will fluctuate (ounces) for a little longer, between $1750 - $2000. By XMas it should be worth $2500 and by this time next year $6500. Start plotting previous highs and lows and match them up to every time something big is announced such as austerity measures, USD moves downwards, unemployemnt rates and jobs growth rates downgraded etc in the USA and you will see the spikes. It takes a long time to plot but it can be done. Starting educating yourself very very well, there is plenty of fact and data out there, and it is worth taking the time to research it.
Last edited by gobbledock; 12th Sep 2011 at 01:45.
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Good video GD!
I still question the point at this time of investing in gold.
You cant eat it.
As you say we are possibly entering hyper inflationary times (god help us!), small denominations of gold/silver would be helpful in bartering for supplies.
In these times survival is all you can value.
Should it go the other way?
Deflationary, well that's text book.
I still question the point at this time of investing in gold.
You cant eat it.
As you say we are possibly entering hyper inflationary times (god help us!), small denominations of gold/silver would be helpful in bartering for supplies.
In these times survival is all you can value.
Should it go the other way?
Deflationary, well that's text book.
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From one of my investment partners in crime -
Although I don't concentrate on Oz or its dollar, I do write a
lot concerning the latest double crises in the Jet Blast threads
US Hamsterwheel and Irish Insolvency. Take a look if you're
interested.
I believe the so-called "Chinese miracle" will be unmasked as
mostly a fraud powered by a huge increase in bad lending from
state-controlled banks. In the currency markets I believe the Euro
will collapse in the second half of this year, as will the Aussie
dollar, which serves as a proxy for the Chinese economy.
I expect this next "down leg" in the world's markets to be more
severe than the crisis of 2008 because the balance sheets of the
Western democracies are now less prepared to manage the losses.
mostly a fraud powered by a huge increase in bad lending from
state-controlled banks. In the currency markets I believe the Euro
will collapse in the second half of this year, as will the Aussie
dollar, which serves as a proxy for the Chinese economy.
I expect this next "down leg" in the world's markets to be more
severe than the crisis of 2008 because the balance sheets of the
Western democracies are now less prepared to manage the losses.
lot concerning the latest double crises in the Jet Blast threads
US Hamsterwheel and Irish Insolvency. Take a look if you're
interested.
Thread Starter
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I notice quite a few posters realise there is a problem, but very few know what to do next. I’ve tried to condense the things I have learnt into a short “first principles” philosophy of monetary theory. This is an attempt at a short, concise summary, not a complete treaties. Hopefully you will think about what I have written and do your own research so you can work out how best to protect yourself. It is not referenced, but all the information is generally available via google searches.
This summary is also relatively “quick & dirty” off the top of my head, and I welcome any corrections. It is my set of operating principles. Am I right or wrong? That is for you to judge. I wouldn't be surprised if our grandparents were much more aware of these principles than we are today. This is not by accident.
============================================================ ===
This is a short essay on my mental model of money, it is draw from many sources, both books and the Internet. Notable references, "Stored Labour - A New Theory Of Money" by Hugh A. Thomas, “The Mystery of Banking” by Murray Rothbard (free download [.pdf] [.epub]) & blogger FOFOA.
Before we delve into the question of money, ask yourself a few couple of questions. . Firstly, Can you define the characteristics of money, what is it? Second, where does it come from. Why do we need money? Stop here and write your answers down before continuing.
In writing your answers, did you find it difficult? I suspect a lot of people will grapple with these apparently simple questions. These are deceptively difficult questions to answer, questions that you have never been forced to confront, but paradoxically are vitally important to your way of life. If you can confidently answer these questions, you probably don't need to read on.
Intrinsic value & Labour
To be have an intrinsic value, a resource around us needs to have some human labour component applied to it. An wild apple tree with a ripe apple has no intrinsic value to any human until some act of labour is applied to it. The simple act of picking the fruit, causes the fruit to gain value, it can now be eaten immediately for sustenance or stored for consumption in the future.
We can take this analogy further, with a farmer providing additional labour to the tree, it will take on a greater intrinsic value. As he prunes, nourishes and protects the tree, more fruit is produced, less is lost to pests and disease, it gains greater intrinsic value. Nothing has value unless human work is done.
The concept of "The Future"
Why would our farmer tend to the apple tree? Because he has the concept of the future. He can image that by providing labour to nurture the tree, it will provide fruit for him at some point in the future, rather than immediately. It is a prerequest to have the concept of tomorrow "the future" for the concept of money to have any meaning.
Trading
Our apple farmer spends a considerable amount of his time tending to his tree, during this time, he is unable to perform other tasks to provide him with shelter & food. So in order to gain these essentials, he trades with someone else for these things. He may trade a certain number of apples directly with another who makes bricks for shelter. This would be a direct exchange - barter. There is a “co-incident of wants”, each desires what the other is offering before the exchange occurs.
However, there are a few problems. The apples are not always available, and when they are they don't last for very long. Additionally the brick maker has no need for apples. However, he has a neighbour that does, That neighbour also has something of value desirable to the brick maker.
The brick maker exchanges a certain number of apples from the farmer for his bricks, he then exchanges the apples for the item from his neighbour. The brick maker has just invented what we call money. This allows two items to be traded through a third (money, the apples). In order for this to happen, all three must have some intrinsic value. What should those values be? Whatever the parties decide each of the three items is worth in relative terms.
What is money?
Economists will tell you money has three characteristics, it is a unit of account (every unit is identical to the next, ie dollars, apples or ounces of gold), it is a medium of exchange, and thirdly, it is a store of value. In this discussion, we will mainly be concerned with the store of value property of money. How did you go with the list you wrote down?
Lets test our example: Unit of account - each apple is roughly identical. Medium of exchange - apples are traded for bricks and then traded for a third item. Store of value, the apple farmers labour is preserved through the two transactions ( the apples have an intrinsic value to the neighbour).
The apple farmer can't always produce a crop, and he can't live on apples alone. How will he provide food and shelter? He can exchange apples for other things he needs directly, or store the labour in something else to be exchanged for his needs in the future. He must produce an excess of apples to his own needs to trade for other items for the times of the year in which he won’t have a harvest.
As we have seen, commodities are money, however some commodities are better than others. Foods rot & spoil at various rates, materials are actually consumed. Over time (5000 years), and by trial and error, the market place decided that the best money was gold & silver. There a very special characteristics of these metals - they are next to each other on the periodic table for a good reason. They are both inert, (although silver does tarnish), they can be cast by fire. Purity can be tested by flame and they are rare. In addition they are not consumed and are not industrial materials (this has changed only in the last 150 years for silver). Both require considerable amount of labour to produce and therefore represent a durable concentrated store of human labour. (As an example it takes 20 to 30 tonnes of material to produce each ounce of gold)
Our apple farmer can exchange his apples at harvest time for precious metals as a store of value to exchange so something else either now or in the future. This is an example of an asset based money system. Literally any asset can be used, however most things simply don’t have suitable physical characteristics. The most important thing to note about an asset based monetary system is represents “final settlement”. The gold (asset) sitting in your hand has no obligation to anyone else, nor does it anyone else owe you. The gold is gold, a lump of inert useless metal, that’s it. In the asset based monetary system, the asset is first created by human labour, then released into circulation.
Fiat Money
Fiat is from the Latin “By Decree” or “make is so” & means that money is what someone says it is. Rather than the marketplace deciding, it is made so by the force of law. Modern currency is “fiat” money, as governments through legal tender laws and require it for tax payments & require debts to be settled in its currency.
Fiat money in the modern banking system is produced as a debt - money is “loaned into existence”. The asset backing the currency is the obligation of someone else to repay that debt in the future.
The best example is that of a mortgage. If you take out a mortgage, you sign a contract the loan note - that is the obligation to repay a sum with specific performance characteristics (period, interest rates, frequency of payments). You also assign the house as security (collateral) over the loan. At the instant you sign the mortgage note, the bank creates a ledger entry in the vendors account (assuming simultaneous settlement for simplicity). The bank has just created the vendors money “out of thin air”, backed by your obligation to repay that amount over a period of time. This is an example of the creation of “credit money”. Note, that this credit money is the book entry version of the paper money.
The vendor is now free to convert his credit money to paper money at the bank. The bank purchases its paper money stock from the Central bank, and this is almost totally seemless to users of the system. Therefore credit & paper money are convertible into each other, in essence there is no practical difference between the two.
However, what happens if your loan goes bad? The credit money created by the bank has been released into the system. The money created could still be a book entry, or it could have been converted to physical cash. In other words the once the money is created it can’t be extinguished, even though the obligation backing the money has lost value. In this case the banks capital is written down, and its shareholders lose the money. If the capital goes to zero, the bank fails.
However, under modern central banking, the bad loan can be purchased at face value from the bank, by the Central Bank. That is the bank hands over your bad loan and receives up to 100 cents in the dollar back from the Central Bank. Where did this money come from? It was of created out of thin air of course! This is how a bailout works, and this is also the basis of inflation. (Inflation is defined as an increase in the money supply)
Notice also that the money is created, but not the interest, this must also be loaned into existence in the future, to pay the obligation in the loan note. It is a mathematical requirement that the amount of money in circulation (both credit and paper) constantly increased to ensure previous debt obligations plus interest are repaid. The compounding nature of interest
is an exponential function, hence, the constant requirement of growth. Without constant growth, the system is mathematically doomed to insolvency, hence the continuous mantra of growth from government & business.
Money is continuously created out of thin air and added to the system, but not removed. Some of this money ends up as reserves back at the Central Bank, but most of it remains in circulation (mainly as credit money). As the money supply has generally increased at a faster rate than the rate of growth of “real production”, more fiat money is constantly chasing real world goods, hence the price of real world goods increases in fiat terms. In reality, the price increases are actually the value of the fiat money is declining in purchasing power against real world production.
This is an example of a debt based monetary system. The important difference is that the money is created first and released into circulation, then the production is created in the future.
Final settlement
There is no “final settlement” when receiving payment in fiat currency. What do I mean by this? When you are paid in fiat for either an asset or your human labour, you receive an asset in the form of someone else’s obligation to continue to make good a payment in the future. That is someone owes you. If you receive paper dollars, you have to find someone to accept those dollars to convert them back into real world produce. That is, you now have counter-party risk. Will someone else always accept an asset that is someone else’s obligation for future human work? Therefore, while ever you hold an asset that is an IOU you have counter-party risk. This is why papeir money is called a “bank note”. Pull one out of your wallet & check, it is signed and counter signed. It is a loan note.
Final settlement can only occur when you receive an asset that has no counter-party risk. It could be an ounce of gold, a bag of wheat or a barrel of oil. None of these have any obligation attached to them
Lets apply the money test once again to fiat currency: Unit of account, yes. Medium of exchange, yes. Store of value - this is where fiat currency fails the test. In the short term yes, in the long term, the store of value function diminishes rapidly over time. Further, this store of value is dependant upon someone always else accepting it as payment in exchange for their human labour in the future,
Summary of differences between asset & debt based monetary systems
The Key difference between the two is when work is done to create money. Asset based systems human labour creating intrinsic value from a resource is done first, then the commodity is released in circulation as the monetary unit. Over time, the market came to use two non-useful metals as a proxy for this created labour. This monetary unit is trustworthy because others will accept this proxy.
Debt based monetary systems can produce the monetary without any work being done at all (except the cost of physically producing the paper or credit), with the promise that human labour will be performed in the future. Once again, the paper asset is a proxy for human labour & intrinsic value, yet to be completed. Users of the system must trust the system to issue only the amount of monetary units capable of supplying real world goods. If more units in excess of production are released into the system, the value in terms of future human labour of each existing unit is diminished.
In both cases a proxy is used to represent stored human labour. The use of the proxy is necessary to allow indirect exchange to avoid the “co-incidence of wants” problem of barter. If everyone agrees on a standardised unit of exchange, then the unit can circulate as money.
Why use fiat Currency
Fiat currency is generally introduced by governements as it provides an “elastic” money supply, that is there is almost always a scarcety of money, and money can be created by governement & the banking system to solve this problem by creating future promises to pay. In other words, it allows creating stored human labour today, for payment by someone else in the future. Governments, not the market place decide what we use as money
Central Banking
Modern banking practice is based on the “fractional reserve” principle. That is, almost all the money deposited is loaned out over and over again, your money already being a loan of course. Modern banks hold around 8% of your money (in Europe, some hold less than 1% and are levered 75:1 loans:capital). This fraudulent practice means that if trust in the bank occurs, a “run” is possible as depositors seek return of their money. Modern banks are insolvent as standard business practice, they cannot meet their contractual obligations if all depositors wanted their currency at once.
Because the system is vulnerable to the dreaded “bank run” a system of Central Banking was introduced, where the Central Bank can act as banker to the banks as “lender of last resort”. Given that the Central Bank can create money out of thin air at no cost, ultimately the penalty is the creation of money inflation (loss of value of each unit), resulting in price increases over time.
The important Central Banks - The Bank Of England (BOE), the Federal Reserve (FED) are privately owned institutions. The European Central Bank (ECB) is owned by other Central Banks in the Eurozone, and while I haven’t looked at their ownership, I’d be confident that they are all ultimately privately owned institutions. Note, some Central Banks are owned by their governements, however they are effectively controlled by the large private central banks through acces to tthe international credit system at the Bank Of International Settlements (BIS) - The central Bankers Central Bank.
Derviatives.
Modern currency can be viewed as a derivative of real world production. In addition, there are derivatives of the currency itself. This allows for fantastic leverage of the future to be brought into the present. Other derviatives include stocks, bonds and exotic financial instruments (plain vanilla options, swaps CDO’s CDS’s etc). See Exeters pyramid.
Why do Governments, Banks & business like fiat Currency?
Governments like the fiat system, because, in conjunction with the private bank owners currency with future payment of human labour can be distributed now to purchase votes. Bankers love it because they get to create money out of thin air and charge interest on that money in addition to skimming some of the money as fees & charges for the credit creation process, and can redeem them into real world assets now.
Businesses love it fbecause future obligations are spent today, allowing price increases through increase currency unit supply. The profits are illusory, as the purchasing power of those “profits” is continuously diminishing.
The Bottom Line
In short, a fiat system allows the future to be spent now. As long as those obligations can be postponed, and users of the system believe the system can continue to postpone the ever increasing future debt against real world production, the system can continue to work. However, once enough users of the system realise the system is mathematically doomed to fail soon, then trust in the system will be lost, and the system will fail. When it fails, those future obligations (paper & credit currency) will lose the stored value function.
Fiat & derivatives of fiat fail the money test as a trustworthy long term store of human labour (value), as they can be created at will at virtually no cost.
Any real world asset can act as a store of value, but not all of them can act as money. Gold & silver have been used for over 5000 years as long term durable stores of human labour. They are not the only store of value, just the most convenient, trustworthy & universally recognised concentrated ones.
This summary is also relatively “quick & dirty” off the top of my head, and I welcome any corrections. It is my set of operating principles. Am I right or wrong? That is for you to judge. I wouldn't be surprised if our grandparents were much more aware of these principles than we are today. This is not by accident.
============================================================ ===
This is a short essay on my mental model of money, it is draw from many sources, both books and the Internet. Notable references, "Stored Labour - A New Theory Of Money" by Hugh A. Thomas, “The Mystery of Banking” by Murray Rothbard (free download [.pdf] [.epub]) & blogger FOFOA.
Before we delve into the question of money, ask yourself a few couple of questions. . Firstly, Can you define the characteristics of money, what is it? Second, where does it come from. Why do we need money? Stop here and write your answers down before continuing.
In writing your answers, did you find it difficult? I suspect a lot of people will grapple with these apparently simple questions. These are deceptively difficult questions to answer, questions that you have never been forced to confront, but paradoxically are vitally important to your way of life. If you can confidently answer these questions, you probably don't need to read on.
Intrinsic value & Labour
To be have an intrinsic value, a resource around us needs to have some human labour component applied to it. An wild apple tree with a ripe apple has no intrinsic value to any human until some act of labour is applied to it. The simple act of picking the fruit, causes the fruit to gain value, it can now be eaten immediately for sustenance or stored for consumption in the future.
We can take this analogy further, with a farmer providing additional labour to the tree, it will take on a greater intrinsic value. As he prunes, nourishes and protects the tree, more fruit is produced, less is lost to pests and disease, it gains greater intrinsic value. Nothing has value unless human work is done.
The concept of "The Future"
Why would our farmer tend to the apple tree? Because he has the concept of the future. He can image that by providing labour to nurture the tree, it will provide fruit for him at some point in the future, rather than immediately. It is a prerequest to have the concept of tomorrow "the future" for the concept of money to have any meaning.
Trading
Our apple farmer spends a considerable amount of his time tending to his tree, during this time, he is unable to perform other tasks to provide him with shelter & food. So in order to gain these essentials, he trades with someone else for these things. He may trade a certain number of apples directly with another who makes bricks for shelter. This would be a direct exchange - barter. There is a “co-incident of wants”, each desires what the other is offering before the exchange occurs.
However, there are a few problems. The apples are not always available, and when they are they don't last for very long. Additionally the brick maker has no need for apples. However, he has a neighbour that does, That neighbour also has something of value desirable to the brick maker.
The brick maker exchanges a certain number of apples from the farmer for his bricks, he then exchanges the apples for the item from his neighbour. The brick maker has just invented what we call money. This allows two items to be traded through a third (money, the apples). In order for this to happen, all three must have some intrinsic value. What should those values be? Whatever the parties decide each of the three items is worth in relative terms.
What is money?
Economists will tell you money has three characteristics, it is a unit of account (every unit is identical to the next, ie dollars, apples or ounces of gold), it is a medium of exchange, and thirdly, it is a store of value. In this discussion, we will mainly be concerned with the store of value property of money. How did you go with the list you wrote down?
Lets test our example: Unit of account - each apple is roughly identical. Medium of exchange - apples are traded for bricks and then traded for a third item. Store of value, the apple farmers labour is preserved through the two transactions ( the apples have an intrinsic value to the neighbour).
The apple farmer can't always produce a crop, and he can't live on apples alone. How will he provide food and shelter? He can exchange apples for other things he needs directly, or store the labour in something else to be exchanged for his needs in the future. He must produce an excess of apples to his own needs to trade for other items for the times of the year in which he won’t have a harvest.
As we have seen, commodities are money, however some commodities are better than others. Foods rot & spoil at various rates, materials are actually consumed. Over time (5000 years), and by trial and error, the market place decided that the best money was gold & silver. There a very special characteristics of these metals - they are next to each other on the periodic table for a good reason. They are both inert, (although silver does tarnish), they can be cast by fire. Purity can be tested by flame and they are rare. In addition they are not consumed and are not industrial materials (this has changed only in the last 150 years for silver). Both require considerable amount of labour to produce and therefore represent a durable concentrated store of human labour. (As an example it takes 20 to 30 tonnes of material to produce each ounce of gold)
Our apple farmer can exchange his apples at harvest time for precious metals as a store of value to exchange so something else either now or in the future. This is an example of an asset based money system. Literally any asset can be used, however most things simply don’t have suitable physical characteristics. The most important thing to note about an asset based monetary system is represents “final settlement”. The gold (asset) sitting in your hand has no obligation to anyone else, nor does it anyone else owe you. The gold is gold, a lump of inert useless metal, that’s it. In the asset based monetary system, the asset is first created by human labour, then released into circulation.
Fiat Money
Fiat is from the Latin “By Decree” or “make is so” & means that money is what someone says it is. Rather than the marketplace deciding, it is made so by the force of law. Modern currency is “fiat” money, as governments through legal tender laws and require it for tax payments & require debts to be settled in its currency.
Fiat money in the modern banking system is produced as a debt - money is “loaned into existence”. The asset backing the currency is the obligation of someone else to repay that debt in the future.
The best example is that of a mortgage. If you take out a mortgage, you sign a contract the loan note - that is the obligation to repay a sum with specific performance characteristics (period, interest rates, frequency of payments). You also assign the house as security (collateral) over the loan. At the instant you sign the mortgage note, the bank creates a ledger entry in the vendors account (assuming simultaneous settlement for simplicity). The bank has just created the vendors money “out of thin air”, backed by your obligation to repay that amount over a period of time. This is an example of the creation of “credit money”. Note, that this credit money is the book entry version of the paper money.
The vendor is now free to convert his credit money to paper money at the bank. The bank purchases its paper money stock from the Central bank, and this is almost totally seemless to users of the system. Therefore credit & paper money are convertible into each other, in essence there is no practical difference between the two.
However, what happens if your loan goes bad? The credit money created by the bank has been released into the system. The money created could still be a book entry, or it could have been converted to physical cash. In other words the once the money is created it can’t be extinguished, even though the obligation backing the money has lost value. In this case the banks capital is written down, and its shareholders lose the money. If the capital goes to zero, the bank fails.
However, under modern central banking, the bad loan can be purchased at face value from the bank, by the Central Bank. That is the bank hands over your bad loan and receives up to 100 cents in the dollar back from the Central Bank. Where did this money come from? It was of created out of thin air of course! This is how a bailout works, and this is also the basis of inflation. (Inflation is defined as an increase in the money supply)
Notice also that the money is created, but not the interest, this must also be loaned into existence in the future, to pay the obligation in the loan note. It is a mathematical requirement that the amount of money in circulation (both credit and paper) constantly increased to ensure previous debt obligations plus interest are repaid. The compounding nature of interest
is an exponential function, hence, the constant requirement of growth. Without constant growth, the system is mathematically doomed to insolvency, hence the continuous mantra of growth from government & business.
Money is continuously created out of thin air and added to the system, but not removed. Some of this money ends up as reserves back at the Central Bank, but most of it remains in circulation (mainly as credit money). As the money supply has generally increased at a faster rate than the rate of growth of “real production”, more fiat money is constantly chasing real world goods, hence the price of real world goods increases in fiat terms. In reality, the price increases are actually the value of the fiat money is declining in purchasing power against real world production.
This is an example of a debt based monetary system. The important difference is that the money is created first and released into circulation, then the production is created in the future.
Final settlement
There is no “final settlement” when receiving payment in fiat currency. What do I mean by this? When you are paid in fiat for either an asset or your human labour, you receive an asset in the form of someone else’s obligation to continue to make good a payment in the future. That is someone owes you. If you receive paper dollars, you have to find someone to accept those dollars to convert them back into real world produce. That is, you now have counter-party risk. Will someone else always accept an asset that is someone else’s obligation for future human work? Therefore, while ever you hold an asset that is an IOU you have counter-party risk. This is why papeir money is called a “bank note”. Pull one out of your wallet & check, it is signed and counter signed. It is a loan note.
Final settlement can only occur when you receive an asset that has no counter-party risk. It could be an ounce of gold, a bag of wheat or a barrel of oil. None of these have any obligation attached to them
Lets apply the money test once again to fiat currency: Unit of account, yes. Medium of exchange, yes. Store of value - this is where fiat currency fails the test. In the short term yes, in the long term, the store of value function diminishes rapidly over time. Further, this store of value is dependant upon someone always else accepting it as payment in exchange for their human labour in the future,
Summary of differences between asset & debt based monetary systems
The Key difference between the two is when work is done to create money. Asset based systems human labour creating intrinsic value from a resource is done first, then the commodity is released in circulation as the monetary unit. Over time, the market came to use two non-useful metals as a proxy for this created labour. This monetary unit is trustworthy because others will accept this proxy.
Debt based monetary systems can produce the monetary without any work being done at all (except the cost of physically producing the paper or credit), with the promise that human labour will be performed in the future. Once again, the paper asset is a proxy for human labour & intrinsic value, yet to be completed. Users of the system must trust the system to issue only the amount of monetary units capable of supplying real world goods. If more units in excess of production are released into the system, the value in terms of future human labour of each existing unit is diminished.
In both cases a proxy is used to represent stored human labour. The use of the proxy is necessary to allow indirect exchange to avoid the “co-incidence of wants” problem of barter. If everyone agrees on a standardised unit of exchange, then the unit can circulate as money.
Why use fiat Currency
Fiat currency is generally introduced by governements as it provides an “elastic” money supply, that is there is almost always a scarcety of money, and money can be created by governement & the banking system to solve this problem by creating future promises to pay. In other words, it allows creating stored human labour today, for payment by someone else in the future. Governments, not the market place decide what we use as money
Central Banking
Modern banking practice is based on the “fractional reserve” principle. That is, almost all the money deposited is loaned out over and over again, your money already being a loan of course. Modern banks hold around 8% of your money (in Europe, some hold less than 1% and are levered 75:1 loans:capital). This fraudulent practice means that if trust in the bank occurs, a “run” is possible as depositors seek return of their money. Modern banks are insolvent as standard business practice, they cannot meet their contractual obligations if all depositors wanted their currency at once.
Because the system is vulnerable to the dreaded “bank run” a system of Central Banking was introduced, where the Central Bank can act as banker to the banks as “lender of last resort”. Given that the Central Bank can create money out of thin air at no cost, ultimately the penalty is the creation of money inflation (loss of value of each unit), resulting in price increases over time.
The important Central Banks - The Bank Of England (BOE), the Federal Reserve (FED) are privately owned institutions. The European Central Bank (ECB) is owned by other Central Banks in the Eurozone, and while I haven’t looked at their ownership, I’d be confident that they are all ultimately privately owned institutions. Note, some Central Banks are owned by their governements, however they are effectively controlled by the large private central banks through acces to tthe international credit system at the Bank Of International Settlements (BIS) - The central Bankers Central Bank.
Derviatives.
Modern currency can be viewed as a derivative of real world production. In addition, there are derivatives of the currency itself. This allows for fantastic leverage of the future to be brought into the present. Other derviatives include stocks, bonds and exotic financial instruments (plain vanilla options, swaps CDO’s CDS’s etc). See Exeters pyramid.
Why do Governments, Banks & business like fiat Currency?
Governments like the fiat system, because, in conjunction with the private bank owners currency with future payment of human labour can be distributed now to purchase votes. Bankers love it because they get to create money out of thin air and charge interest on that money in addition to skimming some of the money as fees & charges for the credit creation process, and can redeem them into real world assets now.
Businesses love it fbecause future obligations are spent today, allowing price increases through increase currency unit supply. The profits are illusory, as the purchasing power of those “profits” is continuously diminishing.
The Bottom Line
In short, a fiat system allows the future to be spent now. As long as those obligations can be postponed, and users of the system believe the system can continue to postpone the ever increasing future debt against real world production, the system can continue to work. However, once enough users of the system realise the system is mathematically doomed to fail soon, then trust in the system will be lost, and the system will fail. When it fails, those future obligations (paper & credit currency) will lose the stored value function.
Fiat & derivatives of fiat fail the money test as a trustworthy long term store of human labour (value), as they can be created at will at virtually no cost.
Any real world asset can act as a store of value, but not all of them can act as money. Gold & silver have been used for over 5000 years as long term durable stores of human labour. They are not the only store of value, just the most convenient, trustworthy & universally recognised concentrated ones.
Fiat Money Supply inflation v's real world production
Exeter's Pyramid
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Great post BB, brings us back to the basics..
Slasher has got some good input as well, on the Irish... Jet Blast page.
Lets move on, we all know we have a problem.
How about using some of that CRM stuff, and come up with some possible scenarios and answers to help the average "wage slave" cope with this dilemma?
Slasher has got some good input as well, on the Irish... Jet Blast page.
Lets move on, we all know we have a problem.
How about using some of that CRM stuff, and come up with some possible scenarios and answers to help the average "wage slave" cope with this dilemma?
Join Date: May 2010
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Meanwhile, in the real world of making money, aka trading it, opportunities abound.
Yet here, in the ethereal world of analysing and looking for that last piece of lint in one's navel, ridiculous amounts of time are wasted sitting on the sidelines, pontificating.
Yes, yes, heard it all before.
Fiat money, world coming to an end, grab your guns n head for the hills.
Why not buy GXY, CNN or, shock horror, COH.
Where were you when AUN traded low? Did you buy TLS Aug 9 basis action post 18 NOV 11, or were you wasting time reading this guff or worse, spending valuable time putting together power point projections explaining the guff?
No love lost on these posters with me. I'm here for a break. Won't last long. Out for a run soon, then back at it. Readers, if you're worried, get an education on how markets work. The world will continue to turn. Product will be needed. Just figure out what that is, believe in yourself, maintain discipline, ensure tight money management and get busy!
**** this lot. They're like bloody Professors at University.
Yet here, in the ethereal world of analysing and looking for that last piece of lint in one's navel, ridiculous amounts of time are wasted sitting on the sidelines, pontificating.
Yes, yes, heard it all before.
Fiat money, world coming to an end, grab your guns n head for the hills.
Why not buy GXY, CNN or, shock horror, COH.
Where were you when AUN traded low? Did you buy TLS Aug 9 basis action post 18 NOV 11, or were you wasting time reading this guff or worse, spending valuable time putting together power point projections explaining the guff?
No love lost on these posters with me. I'm here for a break. Won't last long. Out for a run soon, then back at it. Readers, if you're worried, get an education on how markets work. The world will continue to turn. Product will be needed. Just figure out what that is, believe in yourself, maintain discipline, ensure tight money management and get busy!
**** this lot. They're like bloody Professors at University.