Question About Coin & Currency

[John Kilduff]

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It has value!

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It has market value, just like paper currency, or electronic data entries at a bank. But it's not valuable in and of itself.

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No...gold has high value as an industrial metal, and in medicine, and in electronics. It's not expensive merely because it is shiny and pretty and a psychological storehouse of value and is rare - gold is expensive because it has unique and valuable properties and uses, and is rare.

Did you somehow miss the link I posted earlier in this thread? If you did, please, go back and read about the uses of gold.

Precious metals have high value for what they can be used for in technology and industry - precious metals are not just like pieces of paper or electronic blips representing value. There is actual value there, just as a barrel of oil has actual value, or a ton of wheat. Precious metals, including gold, are commodities (and highly useful commodities at that). Commodities have real value.

[almostbusto]

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Let's examine what happens when a country has no control over its own currency.

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What about Panama? it has a dollarized currency.

there are a lot way to give up control/restrict control.

you can have dollarized currencies, gold standard, a different commodity standard, private commodity based currencies, private fiat currencies, a truly private currency system (let them produce fiat or commodity based or whatever the market deems prudent for money), government licensed private money production (private money but the government can still control supply somewhat), etc etc etc.


people tend to think there is either 1 or 2 ways to deal with money in an economy. which is kind of silly. since nothing else works that way [img]/images/graemlins/smile.gif[/img]

[Arnfinn Madsen]

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we can keep going with this for a while but I hope you get part of the problem

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I hope it was directed at John [img]/images/graemlins/smile.gif[/img], I think it would be terrible to go back to it for most countries.

[LinusKS]

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There can't be "not enough gold" because that scarcity would drive up prices for gold, and thus drive up its purchasing power per unit, and the total value of gold in the economy would increase.

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What you're describing is deflation, which is exactly the problem gold coin/gold backed currency creates.

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Gold does not lead to deflation, progress leads to deflation

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It's the ratio of gold to the size of the economy that determines the price of gold vs. the price of goods and services. When the supply of gold fails to keep up with economic growth, that's what creates deflation.

If the size of the economy never increased, and the supply of gold was always the same, there would be no problem with gold currency.

Neither of those conditions exist, however.

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a gold standard simply rejects the possibility of someone artificially altering the money supply to offset deflation.

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If the ability to counter-act deflation was the only benefit of rejecting gold, that in itself would be a good enough reason to do it.

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Instability allows shifts of resources to happen more quickly. Stability favors the status quo and acts as a barrier to entry, restricting competition and ultimately harming the economy. There is nothing inherently bad about deflation or instability, they affect differing segments of the economy in different ways.

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Sudden and unpredictable changes in the value of money create uncertainty, which in turn increases the cost of capital. Artificially high capital costs, in turn, discourage lending and investing. People who would otherwise invest, are less likely to invest, if they can't be sure of getting back what they've invested. (This is the whole concept of "risk-adjusted returns," and of "risk premiums."

To put it simply, when capital is unavailable (or it's cost is inflated) new deals don't get done, and new business aren't funded, and the economy suffers.

[pvn]

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It has value!

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It has market value, just like paper currency, or electronic data entries at a bank. But it's not valuable in and of itself.

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Why is deflation bad?

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Defalation is bad for two reasons. The first is that it's bad for the same reason inflation is bad. It creates costs because people constantly have to recalculate values. Partly that's bad just because it's annoying (just like with inflation). Partly it's bad because it takes time and effort, and time and effort = money.

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All economic activity does this. Prices fluctuate for all sorts of things, with or without inflation. If you think this is "bad", try micromanaging it.

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Deflation is also bad for another reason. Lenders can easily adjust to inflation by increasing interest rates.

They can't, however, adjust to deflation in the same way, because interest rates can't go below zero. What that means is that in a deflationary environment, real interest rates are artificially and inefficiently high.

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Interest rates CAN go below zero. Just imagine a bank that charges you interest to store your money. A warehousing fee, effectively. And this might be "bad" from one perspective, but it's good from another. Your money is worth more just by sitting on it. We keep hearing that saving is good, and people don't do enough of it, but when something occurs that might actually make people think about it, it's suddenly bad.

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When real interest rates are high, there's less borrowing, which leads to less spending, which in turn causes prices to fall even more - leading to more deflation.

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OH NO, prices dropping! Look out!

How much spending is "optimal"?

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This kind of vicious cycle is one description of what happened during the Great Depression.

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Ahahaha. Yeah. People got poor because prices fell. Just like Wal-Mart makes you poor by selling you stuff for less.

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What kind of "instablity" are you talking about?

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Whenever there's a sudden new infusion of gold into the economy - for example, during the Cal. gold rush, or Deadwood, or after the Spanish Conquest - prices rise dramatically.

Sudden and unexpected changes in prices (changes in the value of money) are bad for the economy both because they randomly reward some people while penalizing others, and because they create uncertainty.

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Random? Some person just sitting at home magically wins the lottery when gold is unearthed?

How is a fiat currency, which rewards politically-connected interests with sudden infusions of cash, any "better" (obviously it's much, much better for those politically-connected recipients of the new money; not so obvious for those further down the line).

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For example, if people can't tell what the value of money is likely to be in the future (they're afraid it may change suddenly or dramatically), they're less likely to invest, and less likely lend or borrow money. Those kinds of costs can be particularly expensive in a modern capital-intensive economy, because they lead to misallocations of capital, and to missed opportunities.

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Oh boy. Again, what's the optimal amount of investment, borrowing, allocation? How does micromanaging the economy avoid misallocations? Making cheap credit available by inflating the money supply is *exactly* the sort of misallocation that causes the boom and bust cycle. Projects that wouldn't get financing under a free market in money suddenly find willing backers because there's money that has to go somewhere (else it will become worthless due to inflation!) so it ends up in crappy second-rate enterprises.

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The alternative of fiat currencies give some other people the ability to devalue my cash at will. That's bad for ME, regardless of it being good or bad for "the economy" (whatever that is).

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Inflation itself has no effect on the value of your money, unless you keep it under your bed, rather than at the bank.

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Are you kidding me? This is supposed to make me feel better? "Don't worry, our monkeying around won't affect you unless you refuse to participate in our monkey-proofing activities!"

Oh, btw, who is most likely to hold their assets in cash? A: The poor.

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Changes in the rate of inflation can either make or cost you money, depending on which side of the transaction you're on. (Borrowers do well when prices rise, lenders do well when they fall.)

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So what? The mugging of a tourist can either make or cost me money, depending if I'm a tourist or a mugger.

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Of course, central banks *cause* that boom and bust cycle

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Central banks do not cause the boom and bust cycle, although private banks do. One of the express purposes of central banks, like the Federal Reserve, is to smooth out that cycle. Economic turbulence (if that's the right word) was more severe before the introduction of central banking, and less severe after.

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Yeah, I guess you missed that "Great Depression" thing that happened after the introduction of central banking.

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What is "intrisic value"?

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Intrinsic value is a concept that used to refer to the value a thing has in and of itself, as opposed to "market value," which is the value created by how much you can sell something for to somebody else.

Paper currency, diamonds, and gold are examples of things that have high market value, but little or no intrinsic value.

Water and air are examples of things that are intrinsically valuable, but have little or no market value.

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Mumbo-jumbo. Basically you're just trying to make up something to explain why your personal subjective valuations of different things are "right" when they are different than market valuations. Supply? Who cares! Air is valuable, gold isn't!!!

[pvn]

Yay central banks!



What would we do without you guys?

[Arnfinn Madsen]

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Let's examine what happens when a country has no control over its own currency.

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What about Panama? it has a dollarized currency.

there are a lot way to give up control/restrict control.

you can have dollarized currencies, gold standard, a different commodity standard, private commodity based currencies, private fiat currencies, a truly private currency system (let them produce fiat or commodity based or whatever the market deems prudent for money), government licensed private money production (private money but the government can still control supply somewhat), etc etc etc.


people tend to think there is either 1 or 2 ways to deal with money in an economy. which is kind of silly. since nothing else works that way [img]/images/graemlins/smile.gif[/img]

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The issue is that for a country's economic growth the credibility of its currency is also very important, so for a country like Panama which has a scetchy reputation the fact that they signalize that they are not in control of their currency is a positive thing. Having i.e. a gold standard currency is better than having one which isn't trusted.

[Arnfinn Madsen]

Pvn, anyway, you may be right that it may work well in AC-land, but the way today's society is built up it wouldn't work well (basically lack of necessary economic flexibility in parts of economic life).

[Arnfinn Madsen]

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What is "intrisic value"?

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Intrinsic value is a concept that used to refer to the value a thing has in and of itself, as opposed to "market value," which is the value created by how much you can sell something for to somebody else.

Paper currency, diamonds, and gold are examples of things that have high market value, but little or no intrinsic value.

Water and air are examples of things that are intrinsically valuable, but have little or no market value.

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Mumbo-jumbo. Basically you're just trying to make up something to explain why your personal subjective valuations of different things are "right" when they are different than market valuations. Supply? Who cares! Air is valuable, gold isn't!!!

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Yeah, he basically made him self judge above all people. KS, you just made up a definition of value, air is basically worthless, a litre of air has next to no value.

[LinusKS]

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No...gold has high value as an industrial metal, and in medicine, and in electronics.

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Most of gold's market value comes from jewelry and from goldbugs' hoarding it, not from its industrial uses.