Excuse me? I really don’t understand your point here. Blatent specultion on swamp land and the like to drive up phoney values is illegal. Just ask Charles Keating. I am going to assume that you are talking about legitimate loans, and ask you again, what the hell are you talking about? Banks can loan money to three catagories of borrowers, private citizens, businesses and government. I am gonna throw out the last one because it’s a whole different kettle of fish, and besides, buying the bonds finances the debt which underwrites the massive government programs that you seem to espouse. That leaves business and individuals. These two types of borrowers don’t borrow money just to bury it in the backyard, they put it to use. An individual may buy a house,( thus securing a safe place for the family to live, and in the long run securing equity for the future ) improve an existing property( thus increasing equity ) or perhapse buy something else( Car, boat, etc… ) The last one provides the individual with something he wants or needs and provides employment for the people who build the item. A business will take the money and use it to improve their business, thus making it mor efficent or profitable, providing jobs and goods that drive the economy.( I know sometimes there are poor uses of the money, but I’m talking about the majority of the time)At the same time, the individuals whose money was put in the bank get a guaranteed safe ( though minimal ) return on their funds. Their money is working for them, too. How this in any way is detremental to the smooth functioning of a capitalistic society is beyond me. The only thing that makes any sense to me is if you are talking about the abuses of the system. If that is your focus, and you see it as a valid point, then I suggest you advocate the banning of cars, food and clothing as without them, there would be no fatal car crashes, food poisoning and ugly fashons.
I was always under the impression that the banks did something with that money. It isn't like they just stick the cash under a mattress and wait for it to grow. That's why banks pay you an interest rate for storing your money with them.
Marc
This is true. What’s not illegal is driving up the share price on a Nasdaq stock whose company hasn’t made a profit since its opening, for example. This is only the most loud example.
My point is not that stock, interest, and currency speculation are bad. (I think they are, but that’s irrelevant to the current debate.)
My point (all those messages ago) was that since those methods of speculation involve the buying and selling of money for a profit, they are not productive. That is to say, they divorce money from its function as a unit of measurement and attempt to use it as a commodity in itself.
In other words, MGibson, I am not referring to the savings function of the bank when I say it produces money; I refer to the selling of money for a profit (i.e. lending).
Let me explain it again. When, for example, stock traders make their fortune by speculating on stocks, they do not do so according to the capitalist method. That is to say, they do not do so by producing a commodity or service for which they are remunerated. They do it by increasing the value of a share in a company, although the real value of that part of the company remains the same.
In other words, if I buy a share of Behemothco for $20 and sell it at the end of the day for $50, that means that *in terms of real products or services - which is what money represents - * I have made $20 worth of real worth cost $50. I have made a profit without selling anything real; I have instead made a profit - on paper - by dividing a fixed amount of real value among a larger number of dollars. And that means that even though the purchasing power of my money is the same - for now - I have reduced the local value of one dollar by 60%.
At any rate.
I brought this up in a context of contrasting the relative productivity of certain fields with their remuneration, and my point in doing this was to show that it is neither necessarily lack of productive work that makes one poor, nor necessarily productive work that makes one rich.
Matt, come on, please tell me you are not serious! Please!
If you buy shares for $20 and sell them for $50 you have reduced the value of the dollar by $60%?? Please!
Maybe I am too simple to understand the complex economics involved but the way I see it you now have $50 which until a minute ago were in another guy’s pocket and those $50 are worth now in your pocket exactly as much as they were in his pocket a minute ago.
You are not the judge of the value of things. The value of things is determined by the market. If I am a palm reader and successfully charge $5000 for a 30 minute session several times a day, you may think the service is not worth the price (and so you would not be a client) but if people are willing to pay it, that is the market value. You do not decide what is productive or valuable, the market does. And note I did not even have to invest a penny, only my time. How does that devalue the dollar I got? The dollar remains just as valuable except it has changed hands.
I go even further, if your parents give you $50 as a gift (in exchange for nothing) are they guilty of devaluing the dollar? I mean in that simple operation you have multiplied your money by infinity! And you didn’t even have to beg!
How about social programs? The recipients get something for nothing. Now that would be inflationary!
KarlGauss thanks for the info about John Ralston Saul (AKA homo ipsus) as I did not know who he was. Very illustrative. 
Don’t you just love people who criticise capitalism while making the best of it? My uncle recently visited Cuba and came back speaking so well of the Cuban system. “They have equality and pride!” Yeah, sure,… never mind that he lives in Switzerland where he is extremely well off thanks to a very different system. When I pointed that out to him he also said we are discussing ideas, not his lifestyle. Yes but I do not care what he says if I see no Swiss are risking their lives to go to Cuba while the Cubans risk theirs trying to get out.
Matt, re the homo ipsus, I do think it is relevant when people do not practice what they preach. To me it shows they do not really believe as much as they say they do.
Theories aside, I do not need to be an expert economist to judge your (or homo ipsus’) ideas. They have been tried and did not work and that is enough for me.
If I have a VCR, I may not understand the function or importance of every last little screw but, if you take a little screw out “because it serves no purpose” and the VCR stops working… I would say the little screw is quite essential for the proper functioning of the system. I do not even need to know what it does, I just know without it the VCR does not work. Now please put it back so I can finish enjoying “Debbie does the Federal Reserve”.
Let me tell you a personal story (like you have a choice … Many years ago I was starting out as a young engineer working for a big multinational conglomerate and I could clearly see the bosses did not have a clue as to how to run the company. I saw how us engineers did all the “real” work of designing and building machines but our salaries were much lower than those of the salesmen who sold them. I mean here are these morons who contribute nothing, who don’t even know how the machine works and they are getting paid five times what I am getting paid! And all for going out and dining with clients. So my view (which I expressed freely) is that “this is wrong, the world is upside down and just wait until my revolution comes along when we will get rid of all lawyers and salespeople”.
Some years have gone by and I now understand things differently. Salespeople are paid more because the market says they are worth more. If they do not sell the stuff, then there is no need for the engineers to design it or built it. To me it could seem they were useless parasites but the market says otherwise.
You think something or somebody is useless? What happens if you take them out? That is the only real test. With that in mind, I think banks perform a necessary service.
Oh, and by the way, Alan Greenspan says he agrees. You know him? He’s the guy who is not married to the Queen of England.
I realize this is a subtle concept, and I’m trying my best to explain it to you, but I don’t think you’re applying as much mental energy to this as you could be, sailor.
The point is that we are talking about a share, and all a share is, is a representation of other monies. It is the promise of a company that they owe you a certain return off of their investment.
If I lend you $20 and you give me an IOU for $20 plus interest, and I turn around and sell that IOU to someone else for $50 (presumably in anticipation of interest), I make $30 profit without having produced anything of value at all. It is essentially the same procedure with a stock.
We are not discussing price here; we are discussing the measurement of value. The difference between you and the guy with the stock is that presumably, the service that you offer is indeed worth $5000. (We are talking about fiscal worth here, not social worth, which is difficult to quantify.) In this case, the system is functioning normally, since you have exchanged a service for money.
However, as above, if you sell me a stock for $5000, that stock has a certain monetary value other than what I paid for it. When you sell it for a profit, you are declaring unequal monetary values to be equal.
No, because the gift my parents gave me or the welfare cheque my roommate receives has the same financial worth no matter whose hands it is in.
I say again: if I had not attributed the quotation but instead had plagiarized it, could you have been persuaded to debate the idea involved? The nature of John Ralston Saul’s personal life is irrelevant to the issue at hand, which is currently a subtle point of economics but used to be a discussion of the work ethics of the poor.
If you wish to discuss his personal life or the personal life of anyone else who is not offering him or herself as a lifestyle model, I suggest you set up a thread in MPSIMS or the BBQ Pit.
I said that they are non-productive in the capitalist sense of producing profit by a means other than selling labour, goods, or services (and we’re talking about usury here, not deposits). What part of this didn’t you understand?
I’m sure if you noodle this out a little more you’ll come to understand it.
If banks didn't charge interest for loans then nobody would be able to to have an interest bearing savings account. The reason you get interest is because the banks are able to use your money towards other things, like loans.
And since loans, and investing I might add, go towards building businesses, jobs, houses, and other neat things I can't say I really see it as useless. They aren't divorcing money from value.
You say usury is not a service. I think it most certainly is a service. Some people need cash to do various things with. So they get a loan and they're able to do whatever it is they wanted to do. A valuable service in my book.I will have to dig out my macroeconomics textbook tonight, but in the meantime I will dredge out a few ideas.
Money is a representation of physical value. It is a tool for allocating physical resources: raw materials, labor, and human intelligence and creativity. To accumulate money is to accumulate the power to make decisions regarding the allocation of resources to particular tasks.
Physical resources have differential value; indeed this observation forms the basis of economics itself. Concentration of resources allow tasks to take advantages of economies of scale. Thus, in many cases, a lot of physical resources applied to a single task can create more value than the same resources applied to many different tasks. A thousand dollars in my mattress can accomplish only so much. Get a hundred of us together, and the hundred thousand dollars can accomplish more than a hundred times more than what we can accomplish individually.
Naturally, one cannot arbitrarily accumulate resources and call that accumulation “added value”. Deciding which tasks deserve allocation of accumulated resources requires human intelligence and creativity. Thus, successfully allocating accumulated resources is a productive task. Banks amd depositors profit from such success, and interest is the method by which this profit is measured.
Additionally, banks are uniquely privileged to create money. A bank will lend more money than it has on deposit. The bank is essentially borrowing money from the future in the expectation that its loans will create sufficient future wealth to repay the excess. Thus the interest retained by the bank additionally accrues to “pay back” such loans from the future.
Typically it is more difficult to extract money from a economic system than it is to insert it. When banks as a group (and/or the Federal Reserve) perceive that the the current money supply does not accurately represent existing physical wealth, they raise interest rates to slow down the insertion of money until the process of wealth creation “catches up” with the existing money supply. Likewise, if they perceive that the creation of wealth is not sufficient to cover their borrowing against the future, they again raise interest rates to narrow existing borrowing.
As we saw in the Great Depression, when the economy itself actually contracts (i.e. physical value actually declines), banks and depositors are really just screwed. The ordinary mechanism of simply slowing down the rate of monetary growth below the rate of growth of physical value no longer works. The fundamental resource the bank manipulates, the future physical value of the economy, ceases to exist.
Remember that macroeconomics is a method of measuring the value of monetary transactions. It says nothing about the transactions themselves; there is nothing inherent in the theory as to how to evaluate physical value. If a society wants to build roads, schools, pyramids or death camps, macroeconomics will tell you how to measure the allocation of your resources for maximum efficiency.
Likewise, I have seen nothing in macroeconomics that evaluates the value of resource distribution. The theory applies to absolute egalitarianism equally as well as to absolute collectivism, whether economic or political.
BUZZZ! Wrong, thank you for playing, don’t forget to pick up your lovely parting gifts.
You have “created” a negotiable contract ( the IOU ) with a stated and anticipated value. It is has form, substance and worth. By signing the IOU, I have said that under these conditions, at this time, I will pay the bearer of this IOU X dollars. It is then worth something, just as is money. so, lets look at the situation again.:
If I lend you $20 and you give me an IOU for $20 plus interest, and I turn around and sell that IOU to someone else for $50 (presumably in anticipation of interest), I make $30 profit without having produced anything of value at all.
Instead let’s say:
If I lend you $20 and you give me (an IOU for $20 plus interest) a check for $50 good 6 months from now, and I turn around and sell that (IOU) check to someone else for $50 (presumably in anticipation of {interest}cashing it), I make $30 profit without having produced anything of value at all, except a check. The check has value!!
Wheater or not I got a good deal is besides the point. In truth you don’t know and shouldn’t care. The fact is you produced an IOU with a specific value at a certain date, and you are free to tear it up, sell it for a loss or proffit, or use it as TP. It’s your choice, but you have in hand ( have created )a negotiable instrament, and THAT has value.
>> I’m sure if you noodle this out a little more you’ll come to understand it.
No, I don’t think so. As I say, we’ll have to agree to disagree. You’re a nice guy but I’d rather you not be in Greenspan’s shoes. But I am sure you’d be much more entertaining than him at a party
Finally, the board’s working again.
We’re discussing two different types of value here. The dollar value of real goods and services is freely changeable, and moves according to what the market will bear and/or whatever restrictions are imposed. So if I buy a cabbage from you for $5000 (for whatever reason), that cabbage is well and truly worth $5000.
Financial instruments are a completely different story. They have a specific dollar value unrelated to their purchase price. No matter whether I sell a stock for $1 or $1 000 000, it is only worth whatever that particular part of the company is worth. That is to say, it can only be redeemed against that much money.
To go back to the cheque, if you sell a $50 cheque for $50, that’s fine; you haven’t created any inflation. However, if you were to sell a $20 check for $50, (pay attention!) the local paper wealth would increase by $30 without the amount of valuables increasing at all. You have an extra $30 cash, but that cash is fundamentally meaningless, because the purpose of money is as a measurement of goods and services, and nobody has produced any extra goods or services to redeem against that cash.
It’s as though I defined the distance between Montreal and New York to be 5000 kilometers. Since no new real difference has been created between Montreal and New York, the length of the kilometer would have to decrease. This would also cause the number of kilometers between all other cities to increase at the same time; for example, I’d now have to drive 7309 “kilometers” to get to Washington DC.
Similarly, if I sell a financial instrument for a profit, no new real worth has been created to redeem that financial instrument against, and for that reason, the value of the dollar would have to decrease.
The reason this is harmful in the case of money, however, is that wages take time to respond to this; moreover, in the case of paper inflation, they cannot increase, because there is nothing new of value. If I make $7 an hour, and prices increase by 10% while my wages remain static, my purchasing power has just decreased by 10%.
The party line is: A dollar is not a thing. It is an abstract unit of measurement of worth, just like a kilometer is an abstract unit of measurement of length. If we declare unequal dollar values equal by selling financial instruments for values other than their face value, we decrease the worth of a dollar.
Matt, that's how value works. You think that 5,000 worth of cabbage is going to be worth 5,000 to everyone? You're divorcing the value of the goods or services from the people who value them. As if these things have some sort of intrinsic value apart from those capable of holding values. You might be able to sell that cabbage for 5,000...but the day before you might have been able to buy the same amount of cabbage for 4,800.
Marc
Right, but the point is, the amount of money that the cabbage is redeemable against is not fixed. The value against which a negotiable instrument like a cheque is redeemable is fixed, or at least is only changeable by factors outside the control of the people buying or selling it (in the case of stocks.)
Even if you sell a $20 cheque for $50, that cheque cannot possibly be worth any value other than $20. That’s the point. The $30 increase in the local money supply has come out of thin air in the sense that it is not related to anything real.
Addressed to matt_mcl:
It is my impression that you think an increase in the supply of money without a corresponding increase in the underlying value of a product or service is detrimental. The reason you believe it to be detrimental, I gather, is that the average workers wage does not respond in a swift enough fashion to provide them with the same level of purchasing power that they had previously.
If my assessment of your position is incorrect then please point out my misinterpretations and clarify your stand. Otherwise, if my assessment of your beliefs is correct I have a couple of questions:
As has been pointed out previously money is “created” when banks lend out more money then they have on deposit. As you point out money is an abstract representation of the worth of things an increase in the supply of money without the increase of a tangible product or service must necessarily cause inflation. It would be naive to assume that 100% of all money lended by a banking institution is allocated to a tangible product or service. Therefore questions 1 and 2 …
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How is the inflation created by a bank “creating” money in the lending process different from the inflation created by the changing value of company shares?
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If you deem the current system to be flawed what is your proposed solution to rectify the situation?
This is getting too deep… let’s have a beer
It depends what you mean by “the changing value of company shares”. If you mean the changing selling price of company shares, then they are the same thing: paper inflation. If you mean “the changing value for which a company share is redeemable”, then since that presumably represents increased corporate profits from the production of goods and services, that kind of inflation is representative of growth, and therefore (up to a point) a positive thing.
My feelings on the subject are irrelevant to the debate at hand, which a long, long time ago was about the wages of productive vs. non-productive work.
I think you are wrong, but I understand. The fundamental flaw in your reasoning is the assumption that there is an “correct” price for everything, outside of the system. The truth is, the economic system itself sets the value of everything. It’s value is whatever it is worth to someone. Lets take your cabbage. You paid $5k for it. It’s not worth $5k, nobody else would pay that for it, but if you were starving, and had $5k, and used it to buy a cabbage and survive,* then it was worth every penny to you.* Take what everyone else would give for a cabbage, throw it in with your price, and you wind up with a cabbage worth, say, $1.25. This is the law of supply and demand. It works the same for anything else, even stock. Is Microsoft stock “worth” $70/share?( I think that’s about right ) Who knows? Are people willing to pay that for it? Yes. Thus within the system as a whole, Msoft shares are “worth” $70. The terms “value”, “worth” and even “money” are subjective. This is all basic economics, matt. The only time I could see your point of view as having merit would be using a measurement of a gold standard or something, and even then you’d have to jump through rings to make the example fit. It wouldn’t be right, but it would fit. What you are describing is a system that is in place in the United States of America today. It the basis for the agriculture omnibus farm bill. It is a huge, multi billion disaster that at the same time pays farmers not to raise a crop, while enacting price supports so that other farmers growing the same crop don’t make less. It needs to be shot, gutted, burned and burried, but it isn’t because of political pressure. I am in no way being judgemental or condesending when I suggest that you study economics more. You are a very bright guy, and I think you need to look at this from a broader view, rather than through the warped vision of a fringe socialist. Marx is great reading and theory too, it just dosen’t work IRL.
When ordinary individuals lend money, pay it back, buy tangible or intangible things from each other, no money is created. It is merely moved around. Presumably, value is created, since the transaction would only occur if both people perceive an increase in value.
When a bank lends money, they are creating money. Inflation results when the underlying physical wealth does not increase at the same rate as money creation.
There are tangible and intangible, direct and indirect. ways of creating value. A salesman, for instance, may not actually create a widget, but, by helping the actual producers sell more units, he increases their effiency.
It is often difficult to accurately assess indirect intangible value. Even the creation of a physical object is not a guarantee of creation of value. If I create an elaborate bomb, it is arguable that I have created zero or even negative value.
If I buy a share of XyzCorp for $10, at that point all the shares of XyzCorp have a presumptive value of $10. However, that’s really phony value. The underlying assets of the company itself have not increased in present value. Rather I am making a wager that the future value, the wealth that XyzCorp will someday create, will eventually put real value behind the expectation.
If I guess wrong, then I’ve just given the guy who bought the shares for $5 (the present value of the underlying assets) $10 of my money. “Real” money has must moved around. If XyzCorp actually creates physical wealth making the shares worth $15, then my foresight has entitled me, in the form of real valuation of my share, to a portion of that created wealth.
Thank you, Feynman, that’s exactly what I was saying.
Have you any intention of reading any of the material I’ve written? I have said the exact opposite. Things that have real value have it because their value is not fixed. A cabbage has no fixed value; it’s worth whatever you pay for it. But a negotiable instrument has a fixed (or at least a predetermined) value - its face value. If you sell for $50 a check or a stock which is only redeemable for its face value of $20, you have decreased the local value of one dollar by a proportionate amount.
No, they are not. A share of stock, like a cheque, has a face value, albeit a changeable one. It is the right to a certain return on the initial investment; the value of this return is determined by the profits of the company. It has no relation to the “share price” of the stock. This is a very important distinction.
Don’t get snotty with me. I am well aware that the value of money is subjective, etc. This has nothing to do with Marx or any of the various flaky ideologies you have somehow determined I hold as a “fringe socialist”.
Please do not allow your predetermined ideas of what you think I believe to cloud your analysis of what I am now saying. Instead, I would appreciate if you would actually read my posts, as opposed to assuming you know what I wrote without reading it.
I’m sorry I shouted.
But it is getting intensely frustrating to have people reply to the position they think I hold, as opposed to the one I do hold and have been at pains to exposit.
Please, please, please - read my posts word for word. Don’t assume you know what I’m going to say. I’m trying very hard to write lucidly and explicitly here about what I know is a subtle concept, and it’s extremely frustrating to feel as though my efforts are going to waste.
To sum up: we are talking about three different kinds of value here. (I am using the word “value” only as an economic concept - not as a social or ethical one. It refers to a number, expressed in dollars.)
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Value of goods and services. This is the price for which a good or service is sold. These values are fluid and freely changeable, and are based upon what the market will bear.
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Face value of negotiable instruments. This is the amount of money against which a negotiable instrument is redeemable from the issuer.* Some types include:
a) a cheque or IOU, redeemable for its face value from the issuer;
b) a stock share, redeemable for a portion of a company’s profits.
Since it is determined at the moment that the negotiable instrument is created, the real worth of the negotiable instrument - the amount for which it may be redeemed from the issuer - can never be altered.
- The amount of money for which a negotiable instrument is sold. Unlike a good or service, a negotiable instrument has a specific value completely unrelated to the value for which it may be bought or sold in the future. A $20 check continues to have a value of exactly $20, no matter how much it is bought or sold for; similarly, a Microsoft share always has a value equivalent to a certain portion of the company’s profits, no matter what the stock exchange does.
At any given time, a Microsoft share you buy for $20 today is redeemable for the same amount of money as the one I bought for $30 yesterday, assuming that the shares represent the same proportion of the company.
In other words, my $30 stock has been made equivalent in value to your $20 stock. If we were both to return our stocks to Microsoft and get the return for our investment, we would get exactly the same amount of money, which would furthermore not be related at all to the price either one of us paid for the stocks. We would pay different amounts to get the exact same amount of money - and therefore one of my dollars would be worth less than one of yours, and neither of our dollars would be worth the same as the dollars for which we are redeeming the stock.
In the case of usury of loans, think of it this way.
Supposing I go to Joe’s Bank and get a $100 loan at a fixed compound interest rate of 1%/day, and say I take 10 days to pay it back. And suppose you do the exact same thing, except you do it tomorrow for 2%/day.
Both of us receive $100. However, I end up repaying (calculates…) $110.46, and you end up repaying $121.90.
In regards to us, I have paid $1.10 on the dollar for the money the bank gave me; you have paid $1.22 on the dollar; and our buddy Jimbo, who didn’t get a loan at all but got the money in his paycheque, paid $1.00 on the dollar, as it were. Each of us now owns dollars that are worth different amounts of goods and services (which is what money measures).
Say Jimbo and I go out to buy VCRs with our money. The VCR merchant sells each of us a $100 VCR. He receives the same amount of money from each of us. However, since I end up having to pay the bank $110.46 to buy that VCR, my money is worth less than Jimbo’s, because I had to spend more money to get the same amount of goods as he does. The value of my money has become divorced to the tune of 10.4% from what it is supposed to do - that is, purchase goods.
Now when I talk about dollars having different values, the problem is that all dollars have the same purchasing power at any given place and time. If A takes $100 out of his savings account (paying $100), and B gets $100 in a loan (paying $110), and C gets $100 from her investments (paying god knows what), all of them have ended up paying different amounts for the exact same amount of purchasing power.
Since money measures purchasing power, and since each of them originally paid a different amount of money for the same purchasing power, money is being divorced from its function.
Does this help you understand me at all?
I’m not sure I’m getting your point, Matt. A dollar does not have value, it is a method of representing my perceived value of a physical or intangible object. If I buy a share of stock for $20, and you buy it for $30, you have perceived a higher value to the stock than I have. We have only moved money around; there is still the same amount of dollars representing virtually the same amount of physical value.
As I mentioned earlier, macroeconomic theory at least attempts to create a politically neutral theory of value measurement. It is not my intention to advance or retard a particular political position or agenda, I merely wish to refine my own understanding of the mathematical theory itself. And it seems to me your interpretation contradicts my admittedly basic understanding.