[frign]

The broad scope of this topic won't be justified in a short comment like this, but it's general knowledge that the economy goes in cycles.

My special area are rare earth metal bonds and EU government bonds. The derivative markets are not a good direct indicator for stability (because they are unstable), but they set the bar for what one can expect. If you look at the M1-data by the FED [0] (M3 is _censored_), you'll see how large the bubble really has become. And this is consistent across all global markets.

Call me an apocalyst, I don't even care. Invest, crash and burn, have fun!

[0]: https://research.stlouisfed.org/fred2/series/M1

[WalterBright]

> cycles

Implies periodicity. But it isn't periodic, it's a chaotic system.

[SatoshiRoberts]

Can you ELI5 the significance of the "money stock" in the graph you linked to?

[frign]

When it gets hot, the FED prints money (they call it quantitative easing) (for 5-year-olds: throw money at the problem). Look at 2008, where they ramped up the money stock like crazy. And afterwards, all these upward bumps were quantitative easing steps to "stabilize" the markets.

However, just realize this is exponential growth. You don't need a maths degree to realize that you can't keep on printing money like crazy and expect the markets to stay stable for much longer.

It takes one person to dig into the matter and ask the question: "But what covers this money?" and bang, you got a stock market crash.

And let's not call it money. What the FED "prints" is currency, sheets of paper. Money has inherent value (gold is money for instance), but not this FED-Dollar lie we live in every day. Since 1914, America has been tricked into believing into this system. When Nixon turned off the Gold standard in 1971, the entire Bretton-Woods-System (built on top of the Dollar) sort of went Berserk.

It's a system built to fail.

[vezzy-fnord]

Fiduciary media is money. Money need not have inherent value for value is subjective and thus cannot be inherent beyond people's achievement of various ends.

The gold standard was turned off far earlier than 1971. In fact, all commodity money standards have suffered subversion or suspension by financial institutions (suspending convertibility of notes) and governments at various times. Nor was gold arrived at by the will of market forces. It was imposed through bank charter, displacing the then-dominant silver in the process. Nor was the international gold standard well designed, for R.G. Hawtrey and Gustav Cassel presciently anticipated its collapse and resulting great depression thereof.

Monetary reform is definitely in order, but commodity money has nothing to do with it. Convertibility requirements can be satisfied with interbank clearinghouses and other means.

[jwallaceparker]

> Nor was gold arrived at by the will of market forces. It was imposed through bank charter

Haven't gold and silver been used as money for thousands of years?

Carl Menger's Origins of Money makes the argument that gold/silver naturally emerge as money through the barter system.

Precious metals best satisfy the characteristics of money:

- Durability - Portability - Divisibility - Uniformity - Limited supply - Acceptability

https://www.stlouisfed.org/education/economic-lowdown-podcas...

[vezzy-fnord]

Menger provides an evolutionary theory of money's emergence and does devote a chapter to the precious metals, but historically all sorts of commodities have served as media of exchange in various circumstances.

The primary standards of international trade during the mercantilist and merchant capitalist eras were silver bullion coins like the Spanish dollar.

Formal gold specie standards arose during the 19th century by royal fiat and soon displaced other currencies.

It is likely that free currencies would settle on precious metal convertibility because of prior art, but there's no reason to presume it has to be gold in particular, or to single out gold as being "special".

[bcg1]

It doesn't have to be gold of course, but in absence of "royal fiat" as you put it... gold has uniquely superior natural properties to most other candidates (rare, fungible, can be divided into extremely small quantities without destroying it, does not tarnish, limited industrial use).

Silver has most of these qualities however it is second only to crude oil in its industrial usefulness (best conductor of heat, best conductor of electricity, shiniest metal when polished, antimicrobial/antibacterial, whatever you call its property that makes it suitable for photography, etc).

Of course you are correct about the use of spanish dollars... this was the origin of the US dollar, which was originally specified as certain quantity of silver in the Coinage Act of 1792. In colonial times it was not uncommon to cut a Spanish dollar into eighths (like a pizza pie) to make change... this is why even today we call $.25 "two bits" and why until a few years ago stock prices were quoted to 1/8 precision. Ironically most markets are electronic now and there are (coincidentally?) 8 "bits" to a byte to so maybe we never should have changed that at all ;)

[AnimalMuppet]

> The primary standards of international trade during the mercantilist and merchant capitalist eras were silver bullion coins like the Spanish dollar.

Fine, but that doesn't answer jwallaceparker's point, which was that gold and silver had been used for money for thousands of years. And weren't ancient Greek coins electrum (gold/silver)?

> Formal gold specie standards arose during the 19th century by royal fiat and soon displaced other currencies.

Fine, but weren't gold and silver used as coin long before that (even if not by formal royal fiat)?

[ap22213]

I would add that currency needs to be convenient, as well.

There's no way that I'm going to lug around a block of gold, a scale, and snips when I have a credit card.

[gozur88]

Currencies can be redeemable. Until 1968 if you held US dollars you could take them to the treasury and trade them for silver coins (or bullion, post 1934). That gives you the benefits of precious metals without the hassle.

[AnimalMuppet]

> And let's not call it money. What the FED "prints" is currency, sheets of paper. Money has inherent value (gold is money for instance), but not this FED-Dollar lie we live in every day.

You don't get to redefine terms like "money" to make your arguments work better - not if you want to talk to the rest of the world. And by the definitions the rest of us use, you are factually wrong.

[jwallaceparker]

I think you're both right.

Commodity money and fiat money are both forms of money.

https://en.wikipedia.org/wiki/Money#Types

But it's fairly simple to see which money holds its value better over time. Gold/silver have held value over millennia while fiat moneys live and die with the states that oversee them.

[AnimalMuppet]

Yes, gold and silver have held up over millenia. But, for example, gold fell from $1700 to $1100 over the last three years or so. Meanwhile, the dollar has held its value pretty well over that term.

So gold and silver are more stable over decades to millenia. They're more volatile over the short run (months/a few years), presuming a competent central bank.

[gozur88]

That's probably true. The whole benefit of a fractional reserve currency is you can manipulate the money supply to smooth out the peaks and valleys, a bit.

On the other, hand the government benefits tremendously from both growth and moderate price inflation, so when one of the "peaks" needs to be moderated a bit it almost never actually happens.

[ThrustVectoring]

You're confusing what money represents with what it is. Money represents an obligation for society to provide you with something of value. Money itself is simply a measure of accounting. Gold isn't money, and many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

[jwallaceparker]

> Money represents an obligation for society to provide you with something of value.

What does that mean?

> many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

This is how commodity money works. The dollar (as well as almost all paper currencies) originated as commodity money. The paper dollar was backed by and convertible to gold.

[ThrustVectoring]

> Money represents an obligation for society to provide you with something of value.

It means that the important part is the obligation and the real value, not the units which get used to track this obligation. Under market-based social norms, if you give someone an awesome massage, then they now "owe you" for it. Perhaps this is in terms of making a website, or cooking lunch, or whatever. The most general form of this is a promise of a favor-not-yet-specified - but that concept needs some unit to measure whether or not you're "even" after making that promise.

The benefit of this is that lots of people like to receive a favor-not-yet-specified, because it can be turned into whatever sort of thing they need most in the future.

In short, that is what money represents - a promise that someone made to provide something of value to whoever winds up with that money.

Now, not any old promise will work well, since the other party wants some kind of guarantee that it can be redeemed later for something of value. This is where the banking system come into play: it creates money by convincing debtors to sign believable contracts to pay the bank back. In the past, it used gold and silver. Notes were convertible to hard currency at banks, and there was a general expectation that you could trade those for the things you wanted at a later point of time. But again, it was that expectation that was important, not the note, and not the commodity backing it.

[dragonwriter]

> > many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

> This is how commodity money works.

No, its how representative (or commodity-backed money) works, as distinct from commodity money.

> The dollar (as well as almost all paper currencies) originated as commodity money.

The dollar (whether you mean the US dollar or its Spanish predecessor) originated as commodity money -- actual silver coins -- true. But most paper currencies (including the -- later -- paper dollars) originated as representative, commodity-backed, money.

> The paper dollar was backed by and convertible to gold.

The original dollar was silver. The original paper dollar was ... a trickier question. If you count the 1861 demand notes as "paper dollars", then, as they were initially redeemable for gold (as the US had switched from a silver to a gold standard) money, they were convertible to (redeemable for) gold -- but they were not backed by gold (and redemption was soon suspended.)

If you mean the first legal tender paper dollars (U.S. Notes) issued soon after the 1861 demand notes, they were pure fiat currency, not backed by or convertible to anything.

[bcg1]

If gold isn't money, then why do central banks have so much of it in their vaults?

[scrupulusalbion]

Strictly speaking, money (as opposed to currency) is whatever is the most commonly used currency in a given region. Gold is not generally used as a medium of exchange anymore (i.e. it is not a currency), so it is merely a valuable commodity.

[ThrustVectoring]

They reasonably expect to be able to trade it for money, should they need to.

[bcg1]

Why don't they have stocks, diamonds, or any other types of valuables in their vaults?

[seoguru]

Dollars certainly do have value. They are effectively tax credits.

watch Warren Mosler: https://www.youtube.com/watch?v=Z1uWVj0YJ3M

[vezzy-fnord]

Legal tender laws are likely more qualitatively significant than ability to pay taxes in of itself.

I'd be wary of the chartalist/state theory of money, since it's somewhat of a truism (state theory of money is correct for money chartered by the state). It tends to ignore that many local currencies have also emerged through different channels.

MMT as promoted by Mosler, Wray, Kelton and Tcherneva is also a syncretic and often uncredited mix of a variety of economic ideas, generally as a clout for the policy activism that its founders promote.

[seoguru]

Certainly there are alternative currencies however their impact on daily lives in the US are small compared to the dollar.

Glad to see you know some of the heterodox. Some other names to add: Bill Mitchell, Frank Newman, James K. Galbraith, Abba Lerner.

My favorite Bill Mitchell video to date: https://www.youtube.com/watch?v=YnyDRwSqp2E I've learned a lot from him.

I'm guessing you know that Bernie Sanders hired Stephanie Kelton as his Chief Economist for the Senate Budget Committee.

[vezzy-fnord]

Size of impact no matter how minuscule, it still poses problems for a chartalist theory of money.

Bill Mitchell's economics frequently take a backseat to his rabid quasi-conspiratorial rantings about the neoliberal order that are in turn instrumental to influencing his economics, unfortunately. James K. Galbraith is far less erudite than his father, who was actually a decent institutional economist, if disagreeable. Abba P. Lerner was a great economist, but his functional finance proposal proved theoretically untenable in light of public choice critiques and has yet to practically materialize anyway. He was also against unions, interestingly enough, in his famous paper "Money as a Creature of the State".

I'd overall rank MMTers are some of the lowest quality of the heterodox, honestly. The circuitists like Marc Lavoie are much better out of the broader Post-Keynesian school.

[nugget]

Let's say I buy into the theory that QE indeed caused significant inflation, but in equity assets and specifically housing, rather than in consumer goods and services where people were watching for it. Now rates are near zero, equities and housing are still relatively high (but not in orbit given their yield relative to bonds paying nothing). Consumer goods and services and commodities remain cheap. Given this macroeconomic picture and the Fed's toolkit, what happens next?

[AnimalMuppet]

I think that depends on what the Fed does next. If it continues to unwind QE, that means that equities and housing come back down, and bond yields slowly rise (presuming that the economy doesn't fall apart too badly in the meantime).

If the Feds return to QE, stocks and real estate go up further. I think stocks do so first, and real estate a bit more slowly.

And I think that what the Fed wants to do is unwind QE reasonably quickly, without causing the economy to tank (the real economy, not just the stock market). The real question is, how rapidly can the Fed unwind QE without damaging the real economy? Or can it unwind it at all?

[nugget]

It seems that when you put money into the hands of the public broadly, they consume goods and services. When you put money into the hands of the top few %, they have much less need for additional goods and services, so instead they invest it, which drives yields down and (consequently) asset prices up. The real question, then, seems to be how do we get money into the hands of tens of millions of grasshoppers and not just a few ants.

[apta]

I don't know why you're being downvoted. Not only is it the issue of moving money away from gold and other physical commodities, but it's also the fact that the system is built on exploitation (mainly in the form of interest, bonds, and similar concepts).

[ktRolster]

   > My special area are rare earth metal bonds and EU government bonds.

A gold bug who has chosen rare earth metals instead of gold. Fascinating.

[NotSammyHagar]

Yeah, someone who says the us economy has been a big scam since 1914, we should all go to gold. You just have to laugh. I feel sorry for him. Yes, there will be depressions and growth spurts in your life, if you are fortunate to live long enough. You can pick one of them and claim that your bizarro econ theories are true, but regardless of being on gold or off it, there will be periods of bust, boom, and depressions. They happened without us being on gold, and happened with us being on gold. so what does being on gold fix?

[ktRolster]

Generally I don't talk to anyone about gold-standards unless they can also discuss the advantages and disadvantages of a bi-metallic standard. That is my 'shibboleth' for determining if they have knowledge or not.

If they don't, I send them off to think about the bi-metallic standard.

[eli_gottlieb]

But why should there be a crash and depression, as opposed to a mere correction and recession?

[NotSammyHagar]

Excellent question. "Because of the secret float of the fed or something. You cannot trust those guys." That's always the answer.

There are non-crazy things to worry about the future - where will jobs come from for average people after we increasingly automate? Not everyone can be a programmer, and we don't need 95% of the population to do that. You can say medical care of palliative care or something. I don't know where the jobs are coming from.

And people that work in the financial industry, trading gold or CDOs, you aren't actually doing anything that helps society. If we stopped have people making money by trading on gold, would it matter to the world? No. Create something useful, that helps people, a new kind of drug. Teach kids. Don't sell real estate or work on faster stock trading algorithms. Grumpy me, my programming is the good kind, not the useless kind :-)

[spangry]

At least for regular stock exchange, I can see why they're necessary (although it took me an embarrassingly long time, given my profession, to figure this out). When a company does an IPO, they're raising capital. All good and productive there. Why do people buy stocks? Two reasons: for a share of the company income (dividends) and to make a windfall gains when the company grows by selling the stock (capital gains).

If you're in it for the second reason, you wouldn't buy the stock if you know there isn't someone else to sell it to in future. The second buyer needs a third buyer, the third need a fourth and so on. And presto. Stock market.

CDOs and other synthetics are a little more questionable. Some arguably lower stock market transaction and search costs: derivative markets provide a source of information that allows stocks to be efficiently priced. Other instruments like CDSs allow risk to be spread and hedged throughout the economy (which in some cases is efficient, particularly if at least some people have risk averse utility functions).

But I'm still learning; I'm a little allergic to finance in general. HFT just seems like cheating to me and adds uncertainty to other transactions. But maybe there's some good argument out there (and feel free to enlighten me if you have one).

All that aside, I personally have much more respect for 'the makers' than 'the ticket clippers' :)