tag:blogger.com,1999:blog-8702840202604739302.post4081128972213849868..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Fiat money in theory and in SomaliaDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger48125tag:blogger.com,1999:blog-8702840202604739302.post-57941084729855802802017-06-05T13:52:52.749-07:002017-06-05T13:52:52.749-07:00Dear professor,
the paper highlights a paradigmat...Dear professor,<br /><br />the paper highlights a paradigmatic case of memory and relative stability of the coordination game but it clearly states that the taxes-drive-money mechanism is still crucial in launching a new currency, albeit the latter might survive without continuous support from the government.<br /><br />The creation of the focal point is still a government business as far as I can learn from the paper.Anonymoushttps://www.blogger.com/profile/13351432649870106818noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-36487503380465699162012-12-14T05:28:36.548-08:002012-12-14T05:28:36.548-08:00This is probably because it is relatively easy to ...This is probably because it is relatively easy to keep track of (remember) individual contributions and rewards in small groups. <a href="http://www.china-direct.net/" rel="nofollow">China Direct</a><br />Anonymoushttps://www.blogger.com/profile/00181753070857437581noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-72154422817177975012012-04-10T21:39:44.135-07:002012-04-10T21:39:44.135-07:00I will always bookmark your blog and may come back...I will always bookmark your blog and may come back at some point. I want to encourage continue your great job, have a nice day!<br /> Please Visit my sites also :- <a href="http://www.vanssale.com.au/fiat-vans-for-sale.html" rel="nofollow">Fiat For Sale</a>Peterhttps://www.blogger.com/profile/15097861253755065165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-50681643741453586792011-09-28T20:44:17.795-07:002011-09-28T20:44:17.795-07:00The story about two men and the green rock is a go...The story about two men and the green rock is a good one, and the method they use to generate money is the same one that we use today to generate US dollars.<br /><br />One man issues a debt (an IOU for a meal) to the other, who paints a rock green (prints new money) and trades it for the IOU. It is a trade -- an asset for new money, with an agreement to trade them back to each other in the future. The trade, and the agreement to trade them back, has "monetized" a debt, and created new money (the green rock) "out of thin air."<br /><br />The same thing happens when a modern bank issues a new loan. It accepts de facto ownership of an asset (home or car used as collateral) in exchange for new money the bank generates with a few keystrokes. The home is analogous to the meal-IOU, and the new US dollars are analogous to the green rock. Further, the bank and the borrower agree to trade the assets back to each other in the future. Not all at once, as is the case on the green-rock island, but over time using a series of trades (mortgage payments to the bank).<br /><br />In both cases, money is generated by a trade of a newly generated, arbitrary item (green rock, US dollars), and an agreement swap them again in the future. The islander values the green rock for the same reason that we value US dollars today (one of the reasons) -- because of the agreement to trade the rock for a meal in the future. It is that agreement that gives a formerly "useless" object value.<br /><br />US dollars are not a "memory." They are generated as part of an agreement, be it a bank loan or a meal swap. Without that agreement, the rock is worthless. They become valuable when they are created, and each time a bank issues a new loan it is creating new green rocks, swapping them for an asset (collateral agreements), and agreeing to exchange the rock for the original asset at any time.<br /><br />The three-step process for creating "fiat" money:<br /><br />1. Print new money<br />2. Trade the money for an asset<br />3. Agree to trade the asset for the new moneyStone Glasgowhttps://www.blogger.com/profile/00545401735030232324noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-16842866077976942452011-09-28T20:14:53.872-07:002011-09-28T20:14:53.872-07:00US dollars, a "fiat" currency, have valu...US dollars, a "fiat" currency, have value for three reasons:<br /><br />1. People with debts in dollars must repay them in dollars. They need those dollars to pay as agreed. This is likely why Somalia continues to use the old currency -- people have long term debts in that currency.<br /><br />2. People need dollars to pay court judgments. They are denominated in dollars, and must be paid in dollars.<br /><br />3. People need dollars to pay taxes, and cannot pay in any other asset.<br /><br />All three of these factors work together to support the demand for fiat dollars, and it makes dollars a form of "real" wealth; as real as anything else, because value is always determined by demand. If individuals value or desire something, it is wealth (as long as it can be owned/traded), even if it appears to have no utility, and appears to lack "intrinsic" value. It is a mistake to separate paper money from other assets; they all have value only because of the needs and wants of the individuals that trade them.<br /><br />It is interesting to note that no matter how many dollars are printed and spent by the government, a person with a debt in dollars is still entitled to repay in the hyper-inflated paper. A man with a mortgage against his home is still able to take full ownership of the home using dollars, no matter how worthless they become.<br /><br />In this way, dollars can be considered to be "redeemable" not in gold, but in the homes, cars and other assets that generate new bank loans. Just as a gold-certificate holder can always redeem his paper for gold, a man with a mortgage can always "redeem" his notes for a house.Stone Glasgowhttps://www.blogger.com/profile/00545401735030232324noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-91530676432198339232011-09-28T20:09:08.042-07:002011-09-28T20:09:08.042-07:00This comment has been removed by the author.Stone Glasgowhttps://www.blogger.com/profile/00545401735030232324noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-43403770346518364482011-09-16T11:48:18.418-07:002011-09-16T11:48:18.418-07:00David:
Yes, exactly. I really like the way you p...David:<br /><br />Yes, exactly. I really like the way you put it, because that's what I'm trying to say. Thanks. <br /><br />" nominal debt contingent on real factors (without explicit renegotiation)"Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2479109363837353802011-09-16T11:29:16.718-07:002011-09-16T11:29:16.718-07:00Hyperinflation is the end of the agreement.
?Hyperinflation is the end of the agreement. <br />?Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-61460099993638524462011-09-16T11:25:31.373-07:002011-09-16T11:25:31.373-07:00Yes, that makes sense. People have studied the ide...Yes, that makes sense. People have studied the idea of state-contingent inflation rates as making nominal debt contingent on real factors (without explicit renegotiation).David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-62020195748783998652011-09-16T11:20:48.162-07:002011-09-16T11:20:48.162-07:00David:
I might even go as far as to suggest that ...David: <br />I might even go as far as to suggest that what money is, is an agreement. Much like debt. In that sense I think inflation can be thought of as the renegotiation of that agreement. If that makes sense.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-29272531396296997852011-09-16T11:16:29.276-07:002011-09-16T11:16:29.276-07:00No, I figured that that is what you meant. I think...No, I figured that that is what you meant. I think this might be largely semantics. Thanks!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-82816373605047143372011-09-16T11:12:51.889-07:002011-09-16T11:12:51.889-07:00David:
I think you're misunderstand what I mea...David:<br />I think you're misunderstand what I mean. . <br />If you think of government as being created to secure rights, that are basically social conventions or accepted morals, that are made into laws to be enforced, and that government power to enforce those laws comes from the consent of the governed then what I said makes sense. Government power has to come from somewhere doesn't it? Check out the 'Declaration of Independence' it says the same about where government power comes from. Though, if you read the bit about self evident truths, endowed by the creator literally it could seem like it came from magic. ;) <br /><br />Even in thinking about a place place ruled by a dictator, they rule because the people in the army and all the other people around ultimately have consented to their government and its laws.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-40886119749003293242011-09-16T10:37:43.151-07:002011-09-16T10:37:43.151-07:00Reverend:
Unless there is some magic force that t...Reverend:<br /><br /><i>Unless there is some magic force that that entitles people to stuff that I'm not aware of.</i><br /><br />If I default on a debt obligation, my creditor may send a sheriff to seize my property without my consent. <br /><br />I'm sorry that you did not find Luther and White informative. Thanks for the link to DeSoto. I have read some of his monetary history book; it's very good.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-32924630569163266472011-09-16T09:16:45.256-07:002011-09-16T09:16:45.256-07:00David:
To the extent that you can be entitled to ...David:<br /><br />To the extent that you can be entitled to anything, I think I'm right (and not just from a philosophical perspective). And it probably is, just a quibble. I think you put it well when you wrote that "the implicit consent of others is what confers this right" which is why, I think, entitles you to anything and what gives it value. Unless there is some magic force that that entitles people to stuff that I'm not aware of.<br /><br />I did read the paper by Luther and White I don't think it was well researched. I feel I learned more about the situation in Somalia, in 5 minutes, doing my own research on the web. <br /><br />I most definitely understand the money is memory idea since I think about money in terms of accounting. I think I have read the Kockerlakota piece previously but, will check it out again. <br />My writing is, I guess, not comprehensible. which doesn't surprise me. <br /><br />On a related note to the Narayana piece, have you read "The Destruction of Economic Facts" by Hernando de Soto?<br /><br />http://www.businessweek.com/magazine/content/11_19/b4227060634112.htmReverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-6295864163633790812011-09-16T07:12:55.157-07:002011-09-16T07:12:55.157-07:00Reverend:
Having money also entitles you to buy ...Reverend:<br /><br /><i> Having money also entitles you to buy anything for sale in that currency also. </i><br /><br />Can't say that I agree with this, though it is probably a quibble. You would argue that the implicit consent of others is what confers this right. <br /><br />Anyway, you should go read the paper by Luther and White; they anticipate some of your concerns about other local governments accepting Shillings.<br /><br />Also, if you don't get the money is memory idea, I recommend you read Narayana Kocherlakota's piece "The Technological Role of Fiat Money." It is published in the Federal Reserve Bank of Minneapolis Quarterly Review and is available online for free.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-48978099954898071362011-09-15T19:44:56.396-07:002011-09-15T19:44:56.396-07:00Should read "I don't think money is a nor...Should read "I don't think money is a normal good"Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-4040241062419400462011-09-15T19:42:26.266-07:002011-09-15T19:42:26.266-07:00David,
Thanks for the response.
I think we are...David,<br /><br />Thanks for the response. <br /><br />I think we are too. My first post was referencing what i thought you had implied about government money not being a government liability. I think it is. You said that government money doesn't entitle you to anything. I said that it entitles you to discharge debts denominated in that monetary unit like property taxes and mortgages. Having money also entitles you to buy anything for sale in that currency also. I think of money specifically as a right. A right that, like all rights depends of the consent of those around you. Usually rights are secured by government that has the consent of the governed. I think that the former government of Somalia no longer exists because they could not make good on their liabilities which were to produce the public goods, the institutions and laws and their enforcement among other things. They no longer had the consent of those who live there. I think you're right that money unit is the unit of memory and since the death of the Somali government did not at the same time destroy all the financial social and contractual relationships, and it didn't change the fact it was used to record past transactions. It is not a one off game for the citizens of that country if you had a debt denominated in shillings you likely still had a debt denominated in shillings. Shillings are just used to determine the relative values of things. If you were owed something you still had a right to collect on that debt that is granted to you by those who live around you. It was not a debt jubilee. I guess it was for those who owed the government. Plus, the fact that there was no internationally recognized government does not mean that there was no "government". I would be surprised if those in charge of the clans did not spend shillings and "tax" their respective populations as their fought their civil war. Though, I don't think that's necessary for its continued use. Integrity of the money is. Which is why Somaliland now has their own shilling. <br />Also, I do not think legal tender laws are needed to compel people to use government money. It is the path of least resistance. Which in economics and politics is usually the rule. <br /><br />I think i get what you were saying about the marginal value of money. But probably not.<br />I'm not sure it makes sense to talk about the marginal value of money that way since it has no value except in relation to things for sale. And though I may value 1 dollar more very little I would really value a million more. Unless there was nothing to buy with it of course. <br /><br />I don't think money is not a normal good (in fact i dont think it is not a good at all) otherwise we would have to assume Warren Buffet is not just irrational but bat shit crazy. Wouldn't we? <br />I probably just don't get what you said. If you could help me understand what I'm not getting about I would be grateful. <br /><br />I was only disagreeing with that one point I mention at the beginning. After that it's just my ADHD babblings about what I believe. Not necessarily any disagreement. I guess I didn't read that way. <br /><br />I prefer orange juice to eating oranges. <br /><br />I hope what I wrote makes sense. Its quite a ramble. <br /><br />Thanks. I've appreciate your continued engagement.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-5245729281060127212011-09-13T19:31:17.667-07:002011-09-13T19:31:17.667-07:00Reverend Moon:
I think that we may be a lot close...Reverend Moon:<br /><br />I think that we may be a lot closer in our thinking than what is suggested by your reply. Still, I'm not exactly sure of all the points you are trying to make or the nature of the criticisms you are levying against my post.<br /><br />I define money as an object that circulates as a medium of exchange. It is distinct from credit. If I had access to a perfect credit market, I would not need money (I would simply purchase the things I need with IOUs taken out against myself...e.g., in the form of promises to deliver future labor). <br /><br />One can still support credit even if people cannot commit to keep their promises if there is sufficient record-keeping (and a credible threat of punishment in the event of default). Absent such record-keeping, a monetary object can serve as a substitute. Perhaps this is what you meant when you said that you considered gold as a mechanism to thwart counterfeit. If so, this would be consistent with what I am saying here. Gold, salt, paper, whatever...these are technologies for recording information (relatively) securely, especially when it is easy to fabricate or counterfeit records. <br /><br />You ask several good questions at the end of your last post. Let me answer them for you.<br /><br /><i>What backs the promises you make to your wife or friends and family?</i><br />The threat of ostracism. <br /><br /><i>What gives them value?</i><br />When your promise to deliver some good or service in the future is desired by one or more individuals. <br /><br /><i>Are they intrinsically worth anything?</i><br />If it is a promise to deliver something of intrinsic value, then yes. (Note: your credit history, the information needed to support good behavior, is, however, intrinsically useless.)<br /> <br /><i>Are they valuable because they are in short supply?</i><br />If you mean value at the margin, then yes. Even oranges derive their marginal value by being short in supply.<br /><br /><i>What happens to the value of your promises if they deliver less than expected?</i><br />Your existing and future promises will be discounted by the market.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85964400200100667242011-09-13T13:46:08.918-07:002011-09-13T13:46:08.918-07:00That's my interpretation, anyways. I hope I p...That's my interpretation, anyways. I hope I properly understood the points you made. Basically I'm saying that the cost of switching away from the shekel while it is still works as the unit of account and medium of exchange makes no practical or economic sense. As long as they are liquid in the sense that their price is not volatile i don't see any benefit in abandoning the shekel. But that could change. <br />What backs the promises you make to your wife or friends and family? What gives them value? Are they intrinsically worth anything? Are they valuable because they are in short supply? What happens to the value of your promises if they deliver less than expected? Does making lots of promises make them worth less if you deliver? Not meant as snark i hope it doesn't read that way.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-23202281758739356402011-09-13T13:00:06.323-07:002011-09-13T13:00:06.323-07:00Thanks for the response. I think of money/credit ...Thanks for the response. I think of money/credit as a social and accounting construct. And banks as guarantors of private credit. In the case of Somalia I would guess that the path of least resistance from both a cost and societal norm perspective would be the continued use of the shekel rather than choosing a popular commodity as the unit of account. I do not believe Menger's theory on the origin of money. I can't think of money as something other than credit. Government money included. The use of gold or whatever commodity for money was still a credit transaction and was, in my mind, used to thwart conterfeiting of credit. I think the important thing is how it can be acquired. If it can be easily acquired through counterfeiting or fraud it would lose its value. I do not know how many shekels were counterfeited relative to the total shekels outstanding but assume that it matters how many people or how much something people are getting for nothing. <br />Your use of demand liabilities to disharge your debt is just you transferring your right to redeem bank credit for government money to that individual who then sells it to his bank who then redeems it for government cheese at you bank. The debt is ultimately discharged with government money not bank credit.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-88695127278555147082011-09-13T09:37:13.274-07:002011-09-13T09:37:13.274-07:00Reverend:
Yes, I am familiar with the argument th...Reverend:<br /><br />Yes, I am familiar with the argument that legal or lawful tender laws endow government paper with a form of backing. The authors of that paper I cite are familiar with that argument as well. <br /><br />My own view is that this is probably correct; at least partially so. That is, there may be more than one force that contributes to the liquidity value of a circulating medium. <br /><br />But if this theory is completely correct, then it suggests that a suspension of legal tender status would render the USD worthless. Suppose that people were free, for example, to discharge their debts, public and private, in any type of financial instrument (note that today, we usually discharge our debt using privately-issued demandable liabilities...not government cash). Would you predict that the USD would cease to circulate? It seems to me that you must make this prediction, if you think that is all that is backing the USD. I personally do not believe that this would happen; though obviously, we have no way of knowing for sure.<br /><br />Thanks for the link. Will take a look, time permitting.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-18717026206854770342011-09-12T18:25:42.687-07:002011-09-12T18:25:42.687-07:00David,
A. Mitchell Innes in "The Banking Law...David,<br /><br />A. Mitchell Innes in "The Banking Law Journal, May 1913" does a great job explaining money. Similar to Macleod. <br /><br />http://moslereconomics.com/mandatory-readings/what-is-money/<br /><br />If you have the time, I think it is well worth a read. It touches on both the IOU theory of money as well as what gives government money it's value and who's liability it is. I think, it also explains the situation in Somolia when you compare it to Innes' historical explanation money. <br /><br />I hope you are still responding to comments on this thread. I would really like to hear your thoughts. Your time permitting, of course.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-89076951101923994912011-09-12T14:14:09.873-07:002011-09-12T14:14:09.873-07:00David,
Of course "USD entitles you to somethi...David,<br />Of course "USD entitles you to something". It entitles you to keep property rights that are encumbered by debt denominated in USD, both public and private. Things like property taxes, mortgages, etc. <br /><br />Macleod is a great resource for understanding how the law and the corresponding definitions of property treats money and banking. <br /><br />PS thank you for writing about something other than Ron Paul.Reverend Moonhttps://www.blogger.com/profile/13154253384955311562noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-51523912020194392692011-09-03T19:55:15.271-07:002011-09-03T19:55:15.271-07:00Mike,
You must be talking about a tiny premium he...Mike,<br /><br /><i>You must be talking about a tiny premium here. Houses make excellent loan collateral,...</i><br /><br />You may have noticed something about the value of this "excellent" collateral over the past five years. ;)<br /><br />You've got me on the quantitative part; I have no idea how large these premia might be in individual cases, but I suppose they might be estimated in some manner. I suspect they can be large in some cases (like USD and Treasuries), but I have no direct way of knowing. On the other hand, you evidently suspect that liquidity premia are non-existent...not sure how you can tell. <br /><br />By the way, in the models I work with, the "premia" can manifest itself either in price or quantity. In the latter case, capital is "over-accumulated" instead of "over-priced." <br /><br />I think that the claims that you make are likely to be true under a given set of conditions. This is where a formal model would be useful.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-87240253981718364782011-09-03T08:36:24.513-07:002011-09-03T08:36:24.513-07:00"The premium that good capital earns in this ..."The premium that good capital earns in this case cannot be bid away."<br /><br />You must be talking about a tiny premium here. Houses make excellent loan collateral, and their aggregate value is many times larger than the amount of paper or credit money that exists. Then there's land, stock, cars, jewelry, future earning power from a stable job, etc. So if I were to make a guess at the size of the premium attributable to ease of use as loan collateral, I'd say maybe 0.1%. I'm curious what your estimate would be.<br /><br />But of course the value of fiat money is not usually attributed to the premium on goods usable as collateral. It's attributed to the liquidity value of paper money, along with state-imposed scarcity of that money. Now, every so-called fiat money I know of is backed by assets of equal value (i.e., If a dollar is trading for 1 oz of copper, then you'll find the issuer holding assets worth 1 oz. as backing for that dollar.). That observation tells me that the liquidity premium is zero. <br /><br />But suppose, for example, that the Mexican peso trades for 1 oz., and it has a true liquidity premium of 0.2 oz. Any issuer of rival money can get a piece of that premium by circulating their own money. Those issuers could be issuing foreign money, or they could be Mexican private banks issuing checking account pesos or credit card pesos. Any of those kinds of money would reduce the demand for base pesos and thus reduce their premium. That competition will exist as long as there is any liquidity premium, so the only stable value for that premium is zero.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.com