Comment by gumby | Hacker News Reader

Comment by gumby | Hacker News Reader

Parent Full thread

> As I pointed out in my old post, there's an old and nagging question in monetary economics that has never been satisfactorily answered: why is fiat money valuable?

I've always been surprised by questions like this. Why is (say) gold valuable? The gold supply fluctuates unpredictably depending on gold strikes and without any consideration for creation of underlying economic value (so is inherently inflationary, except for gold strikes). The big gold strikes of the 19th century were each associated with economic boom/bust. But the underlying utility of gold is low.

Some people complain about a central bank "controlling" the money supply (let's not forget that you "create" money when you use your credit card and "destroy" it when you pay your bill), so monopoly there. That's a fiat too.

In terms of value, the shilling case makes more sense if you think of money in its role of signalling (there are lots of bananas available right now so the price is going down -- don't bother to go harvest some more until the price goes up) rather than as a store of value. That's why people don't worry about counterfeits. Presumably the actual measure of wealth there is not monetary -- perhaps land, more likely some kind of family/community strength.

As robots drive the marginal price of goods and services very low and humans live on UBI, the signalling role will become more significant than the wealth role.

Money: medium of exchange, store of value, unit of account.

Intrinsic utility doesn't really enter into it; the value of money is inherently social, because it relates to other people. You're either going to exchange it for something now, exchange it for something in the future, or hypothesize an exchange to put a numeric value on something concrete, a number you can compare with other numbers.

Right, which is why you need the total money supply to grow/shrink roughly in proportion to the total aggregate wealth (whatever that is -- an ill-defined, poorly understood social construct which we all "kinda" know).

This is what gold bugs (and their bitc equivalents, and...) don't understand: their money supply changes randomly and completely out of phase with the actual economy, with empirical evidence of disastrous consequence. Great in theory, dreadful in practice.

Accounting has a magical provision for this at unusual sequence points (i.e. asset sales): goodwill. When the asset denomination (i.e. cost) is out of whack with what is thought to be the underlying value, the delta is magically stuck in a bin called "goodwill" which then depreciates, slowly smushing it into the overall money supply.

Very interesting comments. I've been thinking a lot about UBI and the one thing I still can't work out is if we are going to just have to print tons of money to be able to make it actually universal (meaning not for people < $50K). Some will still be creating real value for their income so how much is that money devalued by the amount that is given for free via UBI? Will this just cause massive inflation? (I guess I should take some economic theory classes somewhere..)

Consider that in many western economies, inflation has been perilously low for a decade or more. Japan, Europe, and the US all have extremely low inflation today. This leads to some problems we don't usually hear economists worry about--namely that debt-financed personal investments like a home mortgage or a student loan become much more onerous to people who have taken on that debt in the last 20 years. Since such debts tend to have fixed payments over fixed periods, a reasonable rate of inflation would ensure that the real cost of paying off those debts goes down over time, and even if everything else gets more expensive, you still end up with more discretionary income over time, even if your real wages never go up compared to inflation. But with 1% or lower inflation, those debts become a decades-long constant drag on an individual's discretionary income, which may never grow. For real assets, such as homes, inflation also ensures that homeowners actually accrue equity over time, in addition to shrinking debt payments.

All of that is to say, we could do with a couple of decades of 3-4% inflation. Implementing UBI very likely would trigger some inflation, but if there's one thing central banks know how to do and have the power to do, it's clamping down on inflation. Other economists have proposed less direct methods of giving money, from burying caches of cash (to create employment and stimulate investment), to dropping money from helicopters. Sure, those examples were tongue-in-cheek, but you can kill two birds with one stone by using government money to invest in rebuilding infrastructure, building high speed rail, curing cancer and diabetes, paying for more and better public education from pre-K through college. That money pays off in multiple ways: more people have jobs, you stimulate moderate inflation and wage growth, and in the end you have all new infrastructure, new treatments for disease, and a better educated population. Better still, all that money will get spent by all these people with more money and better jobs on buying better housing, newer cars, better food, more luxuries, and that money can make our corporations more profitable and faster-growing...

Yet I fear we are all headed the other direction on these things.

It sounds from your post like you have borrowed money to buy something (a home, perhaps) and are hoping that inflation will make it easier to pay back that debt. Your arguments work exactly in reverse for someone who is saving money for future large purchases and for whom inflation would be a disaster.

Without inflation, the working class is able to accumulate savings and better their lives. They don't need to put their money at risk in the markets or negotiate raises at work just to keep from falling behind.

Better still, all that money will get spent by all these people with more money and better jobs on buying better housing, newer cars, better food, more luxuries, and that money can make our corporations more profitable and faster-growing...

Maybe, maybe not, but all of these things can definitely be had by having a strong, stable currency that does not lose value.

The "go into debt and then have inflation devalue your debt" system creates a divide between people who are eligible to go into such debts, and people who are unable to and thus see their savings eroded by inflation. It would be much better to have stable consumer prices and to keep debt manageable by maintaining low interest rates.

My argument has nothing to do with my personal financial situation. You say the working class can accumulate savings with low inflation, but savings interest rates are basically zero. And the actual data shows people accumulating more debt, and savings are going down. Too much inflation is bad, but so is too little inflation. We've now had 10 years of far too little inflation.

”You say the working class can accumulate savings with low inflation, but savings interest rates are basically zero."

Yes; their savings maintains its value even if it does not earn interest. Inflation would destroy the value of what they have saved. Perhaps people are not saving as much as they would like because they know that inflation will ruin them, so they spend their money earlier than would be prudent.

We have had significant inflation in the past 10 years; the prices of just about everything at the supermarket have soared upward. That we can buy technology like computers and phones cheaper does not make up for this.

> Since such debts tend to have fixed payments over fixed periods, a reasonable rate of inflation would ensure that the real cost of paying off those debts goes down over time,

That's a dangerous assumption for someone to make. Better to consider the debt something used to map asset expense to future earnings (like a company maps dept payment & depreciation to expected asset lifetime).

The system in the US is messed up because there is a foolish bias towards home ownership. I'm not saying owning a home is inherently bad (I own one myself, but I paid cash), just that it is assumed to be inherently good, which is not. In fact it remains economically disastrous.

I'm not saying people should assume inflation will grow. I'm saying more inflation now would help the overall economy grow. I agree with you that there's too much of a push to home ownership (and student loans for that matter). But the fact is that many many people are overburdened with debt, and there are two ways out: slightly higher inflation for a few years, or near-zero inflation for a couple of decades.

Don't forget that the marginal cost of goods should decline, and even plummet. In the long term with robotic farmers, robotic harvest, robotic transport and robotic production the production cost of a shirt will be pennies and there is no reason why the purchase price should be much above the interest stream on the purchases on the robots.

This is a big reason why the productivity numbers aren't as poor as they appear: the number of labor hours required to purchase a shirt or a TV has fallen. You can see that in the massive inflation numbers on labor-intensive industries that haven't been automatable (cf the late Baumol). But when you average them together it looks like productivity hasn't grown as it is denominated in hrs/$

> let's not forget that you "create" money when you use your credit card and "destroy" it when you pay your bill

Can you elaborate on that? My understanding is: when you swipe your credit card, Visa loans you money and pays it to the merchant. When you pay your bill, Visa gets money from your bank. How is that creation or destruction of money? Seems like value is conserved to me.

It's the second of June and you have $100 in your pocket.

Case 1: You hand me $100, I hand you a widget. I put that $100 in the bank, and over the course of the month go to the ATM five times, take out $20 bucks each time, and spend it. The money supply in Palo Alto is the same all June long.

Case 2: You use your credit card to give me $100; I hand you a widget. You still have $100 in your pocket while I have $100 in my bank account I can go spend. For the month of June the money supply is $100 larger. At the end of the month you pay off your bill and the money supply shrinks back to its prior level.

Macroeconomists and central banks use various definitions of "the amount of money" (with names like M0, M1 etc) to measure different things, just as there are different measures of unemployment, inflation etc, all designed to adjust / smooth / emphasize different phenomena. Like different filters in a circuit: https://en.wikipedia.org/wiki/Money_supply

This is why I am always infuriated by politicians who use microeconomic analogies when discussing macroeconomic things like government debt and trade policy. I just assume they aren't as ignorant as they sound, which may be foolishness on my part.

I believe the parent poster was mentioning the modern ability of commercial banks to actually create money through loans. There are many places to read about it, I quickly found http://positivemoney.org/how-money-works/advanced/how-commer... but there might be better sources

That article seems like an oversimplification.

Isn't the bank is still on the hook for its liabilities? It might be playing a dangerous game, but it's betting against a bank run (which are rare) and on itself having enough liquid cash on hand to handle withdrawals during reasonable circumstances. We all know banks invest our cash (in loans and tons of other vehicles) in order to earn their profits (and our interest.)

https://en.wikipedia.org/wiki/Fractional-reserve_banking

"Visa loans you money"

edit: Visa doesn't loan the money, participating bank does. and when bank loans the money, most likely it is money that bank doesn't have, i.e. created money.

Reply on news.ycombinator.com