Wednesday, May 06, 2009

Economic Skepticism Attempt #1: Money Fundamentals

Well, since I've bumped into another 9/11 conspiracy nut who ranted on about the fiat money standard, I thought I'd attempt to cover some basic economics from what I remember in my high school classes, since many woos don't seem to recall even that level study. I've heard some people complain about the "fakeness" of fiat money, which is what we're currently on here in the US: Those green slips of paper and those numbers in your bank account are valuable because we say so. For the people who complain about the fakeness of that and want us to get back onto the gold standard, there's a little something I need to drill into your head:

The value of gold is just as fake.

Precious metals are only really precious because we agree they're precious. Sure, gold has some value for electronics, since it's a good conductor and is very resistant to corrosion, but stuff like that's only recent in human history: Gold is seen as valuable because it's shiny and rare. That's about it.

For a long time, gold and silver have been good enough to serve as a medium of exchange because they can't be duplicated (sorry, alchemists), they're scarce enough to be conveniently small, and still common enough that you could mint coins and such for public use. That's not much different than paper money: US currency is difficult to counterfeit (duplicated), it's scarce enough to be meaningful, and there's enough of it to be used by the public. That can be subject to change with fiat money, since the government can increase minting or someone can hoard the money, taking it out of circulation. Of course that's not much different than with notes backed with precious metals: How much is "a dollar worth of gold" anyway?

Fiat money just takes out the middleman of shiny metals.

As for the government supposedly taking away the value of a dollar by simply no longer accepting it for transactions, well, that's their loss. How are they going to convince the guy at my local comic shop not to take my dollars in exchange for packs of cards? That's about the same as convincing a nation of internet goers that kitten videos aren't cute. Money is a human construct based on our emotions and perceptions, not a tangible thing.

I play Magic. I have some cards that are worth a fair amount of money right now. A couple decades from now, the game could very well stop being popular enough to justify printing new cards. At that point, a card in my collection, which hasn't changed at all, could very well cease to have any value beyond being a very thin drink coaster. For the government to kill the value of the US fiat dollar, they'd have to somehow make it profoundly unpopular.

Back on the topic of overprinting cash: I'm pretty sure if the government tried that in an effort to devalue the dollar, they'd have mass riots and revolutionaries to deal with on every class level, and probably plenty of foreign intervention, since a lot of overseas businesses use US dollars. Not exactly a competent thing to do if you're trying to control people.

Since my economic education's just limited to high school, some marketing classes, and some rational-seeming blog posts, feel free to bring up points I might have missed.

Possible next entry: The myth of fixed value.


MWchase said...

Not to provide you with even more material, or anything, but... Why would the government even want to 'destroy' or whatever, the dollar, anyway? Even if every dollar spontaneously becomes worthless, we're not going to pull a Federation of Planets and go without money. There's plenty of money out there, and the difference, so far as 'the government' is concerned, is that federal policy can't influence it.

Deliberately making a superpower subject to the whims of foreign powers: stupid idea or stupidest idea?

(Honestly, as evil plans go, "force a switch to the yen", or whichever currency takes hold, is... that's giving people splinters from scraping the bottom of the barrel. Keeping in mind that the Chinese government shouldn't be too interested, since they kind of own a chunk of economy anyway, IIRC)

Bronze Dog said...

Do have those who talk about "The Amero" while waggling their fingers sinisterly, which... well, how exactly would that change anything?

MWchase said...

We'd be at parity with Canada again?

Wikinite said...

Sometimes you want the dollar to depreciate. It stimulates aggregate demand which in the short term can raise the real GDP (along with prices), which is what you want in a recession.

MWchase said...

Well, yeah, but we're discussing the complete destruction or whatever of the dollar. As I see it, pretty much everybody is invested in the continued existence of dollars, so there's nobody in power who'd try to eliminate them, especially not here.

James K said...

Hi, long-time lurker, first time poster. Since I have a Master's Degree in economics I thought I'd chime in.

You have the right of it. Inherent value is economic flat-earthism. Gold, like anything, has value because people are willing to give things up to get it. If the Fed disavowed the Dollar it may well retain its value as long as they print any more of it. Lots of collectible coins are worth more than their face value because they are pretty and rare.

If you are worried about losing your savings to inflation you should 1) diversfy your savings into foreign-denominated securities (this is a good idea anyway) or 2) (in event of economic apocalypse) stockpile durable items you can use in the event of economic collapse like canned goods and ammunition.

Gold can be useful as a hedge against inflation as part of a diversified portfolio, but it's hardly some magical protection against government malfeasance or economic ruin.

Bronze Dog said...

Thanks for the vote of confidence, James. I had an interest in economics, myself, mostly because the fundamentals involve raising awareness of things we take for granted.

Feel free to suggest future topics for the series.

Tom Foss said...

The value of gold is just as fake.

Yes! Thank you! The number of times I've had to explain this is ridiculous! We make arbitrary determinations about what things have value, and then trade those things for goods and services. Money is the most common one, but there are plenty of alternate currencies that you can find in various places (swap meets, University currency, WoW gold, Itchy & Scratchy Bucks, etc.). As long as the buyer and seller agree on a common value, it doesn't matter what we're trading, or whether or not those things have any "intrinsic" value.

Dark Jaguar said...

I suppose you're the guy to ask this. The Feds print out new money to add to circulation. Part of it is just to replace worn out currency, but as I hear repeatedly, a good amount is meant to add to the net economy.

So my question is, how do they get it out there? Do they just hand large sacks of cash to random people? Do they just go on a buying spree, say using that printed money to pay for civic labor and such? Do they loan it out, and if so, what does a loan of that sort mean?

I've never heard of this sort of delusion. It's bizarre to think there's people who want us to go "back to" the gold standard. Generally, in cases like this I only hear from ignorant sorts who think we still DO use the gold standard, who when asked what determines the value of the dollar will just say "Fort Knox".

Another thing I am starting to hear as of late is a comparison of people considering money valuable to believing in god. The argument goes something along the lines of "money is only real because we have faith in it, and that's like god". Firstly it misrepresents the nature of the economy. It's not that we put blind faith into the dollar as individuals and that gives it power, but rather that we put VALUE into it, and en masse so long as others also value it THAT gives it power. If I alone thought it was valuable, it would be valuable to me, and I might accept it as payment, but no one else would, and I'd have to acknowledge that money is now worthless in spite of my willingness to take it as payment. That's hardly faith. It's closer to a mass self-perpetuating agreement than faith. Further, what sort of god are they saying they have? Is it like imaginary friends in some movies where they fade out of existance if their kid stops believing in them? Most believers I know would say god exists whether one believes in it or not. Further how do you "trade" in god points? Further still, not a single person thinks money gains special powers if one has "confidence" in it. It won't cure our ills or build things, people do that FOR it, but not a single person who "believes" in money believes some mystical thing like money can fly or heal the sick or watches over us (well, maybe objectivists). The analogy just doesn't work.

Another thing I hear recently, such as on a recent episode of South Park, is along the lines of "Just have faith in the economy and spend!". The idea here seems to be that debt is a total illusion and if you just THINK you can spend and continue to build debt you'll be fine and there's nothing at all wrong with it because money's only worth what we think it's worth. I really have no idea what was wrong with those South Park guys when they did that but that's one of the most self destructive ways of dealing with this economy situation I've yet heard. The idea apparently is that you have to buy things to stimulate the econonmy, and nuts to your debt. Well, the fact is police will come a'knockin' at your door if you ignore your debt for too long. Further, it's not always possible to CREATE a line of credit just like that, things can get "maxxed out". Further, buying crap you can't actually afford is what got us INTO this situation when everyone realized it was all just a worthless house of cards and they were no longer able to collect on anything. In the end, the money we use regardless of what confidence we have in it to trade, has to be traded FOR things, and when you can't get any food for the work or products you provide, faking like you are rich won't put food on your plate. It's a really dumb idea.

Bronze Dog said...

I was amused at that South Park episode, myself, mostly for the Kyle=Jesus thing they had going.

As for saving versus spending, well, you do need to do some spending, since hoarding what you have slows down the economy. Of course, being reckless is just as bad as being miserly.

One note about Kyle putting everyone's debt onto his no-limit credit card would have an economic impact on more than himself: It's essentially taking the money out of the credit company's vault, since he can't pay that back. There's a reason you normally need a credit rating to get a card.

Of course, I'm open to criticism on all my points. I imagine James has some more detailed commentary to make.

James K said...

Bronze Dog: The Laffer Curve would be a good topic since there are widespread misconceptions about it.

Dark Jaguar: I'm a microeconomist by speciality and the macro I did at university was about New Zealand's monetary policy not yours so I'm not 100% sure how the Fed does it, but the basic mechanism is lending money to banks. By lowering their interest rate to the banks they encourage them to borrow more, increasing the amount of money they can lend out. This increases the amount of money in circulation.

The relationship between value and faith is an interesting one. I would say that value is a property of the human brain, not a property of the wider universe. This doesn't mean value is imaginary because we're not suggesting that value can directly affect anything not connected to our central nervous systems. Pain is also in your head, but that doesn't mean its not real.

On South Park and debt, well that's just silly. What debt is is spending income you don't have yet but will. The money you can borrow is constrained by your future income. Default happens when a lender overestimtes your future income over the relevant time horizon.

If you try to borrow forever without paying it back you'll find it very hard to get credit.

Dark Jaguar said...

Yeah I agree that some spending should be done, but preferably only your own cash.

I speak of debt but the fact is I'm the sort of person who has thus far avoided even getting a credit card, excepting my debit card which is hardly the same thing. I just don't even want the temptation. Instead of depending on a credit card in an "emergency", I simply save up cash for the future, which is surprisingly easy when I don't have interest and debts to repay.

Ian Pulsford said...

I realise I am very late to this party, but I've been thinking about gold recently after someone recommended a piece of libertarian gold standard conspiracy theory reading to me (that abandoning the gold standard was a banker's conspiracy to strip everyone else of their cash). I can think of at least two other reasons for decoupling the dollar from gold. I am not an economist, these are just a couple of ideas that occurred to me regarding gold as a sort of "golden" standard. (And have no doubt occurred to others as well.)

Firstly the supply of gold and population change. If gold supply doesn't match population growth then dollars (tied to gold) become more or less scarce. The ratio of dollars to oz of gold could be adjusted of course, but that just shows that the "standard" is arbitrary anyway.

Secondly, gold has become more valuable as a commodity in the last 50 years, particularly as a component in useful things such as electronics. Hence part of the reason the price took off after it was decoupled no doubt. Maybe we humans should lose our shiny metal fetish and treat it purely as a useful commodity.

If anything, the history of the price of gold since 1971 should be a lesson to the above-mentioned libertarian conspiratorialist that gold wants to be free and not tied to the dollar.

If anything, the GFC and other current economic problems should be blamed on poor economic management and loopholes but not on abandoning the gold standard. I could be convinced that abandoning the gold standard lead to the shape of current problems, but it was abandoned to avoid problems of its own in my limited understanding.