So I’ve been trying to understand macroeconomics as a layman. I feel like I have a huge gaping hole in my mental model of it, and in particular in the metaphors I use to understand money. Money seems like a 1) fluid, or like electricity, and is of course a 2) measure and means of exchange but it also seems to represent 3) people’s desires and 4) their expectations of their future ability… to satisfy their future desires?? It seems as well 5) like a way to smooth out, over time, one’s lifetime expected consumption and money therefore also seems to be 6) debt.
It’s a mess in my mind. Can someone tell me the way to think about money that answers some of the below questions? They all relate to my warped understanding of what money is and how it relates to the underlying distribution of goods and services.
Also any recommendations of books that ask these fundamental “why is the sky blue?” questions in a naive, child-like manner would be much appreciated.
Some example questions I’ve had:
Why is a trade deficit a bad thing – doesn’t it just mean that some other country is giving you lots of goods and services for cheap?
Similarly, why is it bad if other countries want to give the US cheap credit by buying tons of treasury bonds at low interest rates? Again, isn’t that just to their detriment?
Why do countries want to be export-driven? For example, Germany is accused of exacerbating the Euro crisis by not buying enough, and selling too much at cheap prices to other countries in the Euro Zone. But why does Germany want to do this? Doesn’t that reduce their standard of living and increase the standard of countries like Greece?
If jobs, rather than real ability to consume are the issue, could Germany in theory import more and export less, and redistribute the net capture in real terms to its citizenry?
For that matter, why does it matter that a zone with the same currency have the same levels of productivity? Why would it matter if Greece and Germany shared a currency without sharing productivity levels?
I understand that it makes it difficult for Greece to devalue its currency – but what is really happening with devaluation, anyway? I devalue my currency – and what am I really saying about the underlying distribution of goods and services, desires and expectations; and why couldn’t that same thing be said without devaluation?
More importantly – what’s the thought process that would lead one to realize or reason that this currency issue is a problem?
Why is it theoretically impossible to have an exactly zero inflation rate?
Is what happened in the financial crisis basically a crisis of expectations of where money would flow – in other words, incorrect predictions of where the people who had it would be willing to put it? Because of course, the total supply of money in the world did not go down in the crisis, right? So the crisis was a misjudgment about people’s future willingness to trade given the current distribution of money? And now the money is in the wrong hands and the arrangements haven’t been made to coordinate new, better trades?
it seems like money represents desire, but money also represents ability to pay. And the nominal sums of money that are exchanged seem completely independent of the actual standard of living and goods and services they represent. Is that right? We could be living with 19th century technology and standards of living and the crisis could have happened just as it did, no?
In theory, if money circulates fast enough – if its velocity is fast enough, everyone can have an unlimited amount of money, no? If trade happens very quickly, then people can keep recycling the money they have over and over.
It’s only when the money circulating somehow seems out of sync with the underlying goods and services generated by it that the trades no longer seem worth it to certain of its traders. That is, some of the people who have money have desires for things other than what they were expected to desire. Right?
Think of money as another good - like candy or wheat or gasoline. It’s just easier to carry around and more people will exchange it for more things than if you try to barter a gallon of gas. Therefore, money becomes the most commonly bartered item and so things are valued in terms of money. (Originally, this was exactly the case - money was specifically precious metals, typically minted into pre-measured quantities, rather than paper or electronic bits representing value.)
So if there’s lots of it around, it’s not as valuable, people want more of it for their hard-produced goods and services - thus inflation. (You’ve got a million dollars, you can pay me $1,000 for fixing your plumbing; Joe down the street will want more for his beef if you’re bidding against me for prime steaks.) Different country currencies are just different trade goods. If I want to buy from China, I have to buy Yuan first, or they have to agree to take dollars… which of course, they have to either use to buy American products, or trade to someone else (what will that person give them in euros per dollar?) to get, say, Euros to buy a BMW. Money is just a trade good.
Trade deficit? One country is accumulating a pile of the other country’s money. Sooner or later they will want to cash it in. If everyone knows there are lots of dollars floating around that will need to be traded, the value of a dollar in yuan or euros will (or should) go down. “why would I trade euros for dollar at that rate with you, mister Swiss Banker, when I know China is swimming in dollars and would be happy to sell a few for a lower rate just to get rid of them?”
(However, sometimes the trade deficit is solved by capital investment. The Saudis decades ago, the Chinese today - take their dollars made from selling stuff to the USA, and use it to buy back the USA - real estate, companies, etc. It’s not trade, but they are coming in and giving money to Americans in return for real estate titles or shares. Those dollars are now Back In The USSA)
The basic scientifically validated models of economics use assumptions that are frequently factually wrong. For instance, the efficient markets hypothesis neglects to factor in the issue that all the actors in a marketplace get their information from a limited number of sources who are all cribbing off one another.
There’s a crapton of individuals out there who are running various scams to make money who claim to have answers to your questions. They are wrong.
If scientifically validated answers to your questions existed that were accepted by a majority of economists and proven mathematically to work, the major economic collapses of recent times would not have occurred in the first place.
With a trade deficit, a country is living beyond its means, and buying goods produced with foriegn labor rather than domestic labor. If a net of goods is flowing into a country, wealth (whether in the form of cash, bonds, or asset ownership like stock certificates) will flow out.
Our grandchildren go into debt, in part because their grandparents were not productive, or over-spent rather than being frugal. And/or, as cash or bonds are converted into stock or real estate, an increasing share of the importing country will be foreign-owned.
To avoid the problems suggested in (1) and (2).
3a. “Net capture”? Like the U.S., Germany could sell bonds overseas redeemable tomorrow, for increased consumption today.
Different economic conditions require different interest rates, inflation rates, and foreign exchange rates. Such differences become difficult or impossible with a common currency.
Who said it was? Central banks often deliberately strive for a positive non-zero inflation rate; is that what you refer to?
The money supply did go down, and is being deliberately boosted by central banks. Getting money into the “right hands” is indeed a problem, with the basic hope being that banks or investors will fund ventures likely to be successful.
Much of the confusion about “money” would disappear if you use a substitute word: perhaps “wealth”, or “economic production.”