A Blog While We Wait
December 08, 2010
– Comments (34)
I prefer to two-player interaction. Going solo reminds me of something else. Meanwhile, as we wait for a Modern Monetary Theory proponent to accept my challenge, let's have a friendly chat.
Metal Manipulation Mania
There have been some interesting blogs about JP Morgan and silver manipulation lately. To paraphrase: there is no evidence that silver is being manipulated, but it might be. I agree. There is no evidence. And it might be true. =D
But there's a couple things that I would like to add. First, I don't care either way. I've never needed a silver "price manipulation theory" (or a gold one) to understand the fundamental reasons for owning gold or silver. I have never joined the manipulation crowd and I probably never will. Ted Butler, one of the most prominent silver manipulation theorists, has been doing this since the early 1980's. He has never produced a shred of evidence. Silver goes up in price because dollars increase faster than silver, ceteris paribus. Silver goes down in price when investors overestimate the extent to which this will happen. It's really that simple. It has notihing to do with Metal Manipulation Mania. If people think the banks are pushing the price down, so be it. It's really not importannt. Many people are at a loss to explain rising commodity prices in general, and rising metal prices specifically. Unfortunately, we can't even adequately settle upon the meaning of words used to describe rising prices. This makes critical thinking on the subject of price rises rather difficult.
Make Them Define the Terms
If you get confused by the Inflation/Deflation debates, here is sound advice: make the debators define the terms before you consider their argument. Let me give you an example. Recently a little known blogger posted a link to a few items that had fallen in price recently. He then summed it up with the statement: "evidence of deflation." I'm not going to link to the blog in question, since it's not worth it, but it represents a common mistake.
Deflation is a persistent drop in the general price level. Now, we can assume that economists argue all the time over the exact meaning of the bolded words in the previous statement. Let's just step away from that debate for a moment. We can clearly see what does not qualify as deflation. The massive decline in housing prices, for example, is not deflation since it only applies to one sector of the economy. Likewise, we can say this about any popped bubble. A more sophisticated approach might point out that housing price declines may cause a general and persistent decline in prices, i.e. deflation. Perhaps. Though this has never happened since the world has gone completely paper.
Inflation can be defined in probably a half dozen ways depending upon which economist you ask. For four thousand years, before there was a professional class of economists, there was a widely accepted definition: inflation was the act of debasing currency. In other words, inflation was an action by humans to deliberately manipulate the currency to the manipulator's benefit. Pointing out the inflation was an action and not an event or situation is very important. It assigns blame. Of course, we don't define it that way today. I strongly suspect that this is due to the rise of a professional class of economists who owe their livelihoods to the money manipulators.
The generally accepted present day definition is a persistent rise in the general price level. Again, modern day economists spend a great deal of "productive" time arguing about the definition of those two words. Don't let it bother you. Just ask the blogger/writer/debator to define them his or herself.
Here's where I stand:
1. Deflation defined as a persistent drop in the general price level, ceteris paribus, is a good thing.
2. Bubbles popping are bad. However, bubbles being formed are the real problem.
3. Inflation is the act of currency debasement. Monopoly money production by the Federal Reserve is always inflation, but this conclusion requires further explanation.
Money, Money Substitutes, and !Money
There is money and then there is money substitutes. And then there is !Money. (The exclamation is a negation symbol in logical notation. It reads as "Not Money.")
Money comes about naturally. Its value is determined by the subjective evaluations of market participants. These subjective evaluations are arrived at voluntarily. Nobody put a gun to their head and told them to use this commodity as a money or that one. At least, until governments got involved, in particular when government demanded that taxes be paid using a certain money.
At the point that someone puts a gun to your head and says "use this as money," your evaluation of its value is no longer arrived at voluntarily. Likewise, if you wake up tomorrow and everyone is using chocolate doughnuts as money (that would mean you are in Heaven, of course), your decision to use chocolate doughnuts is not arrived at voluntarily either. There is no market for money, and therefore, there is no money. There is !Money. In other words, it's something else. It's fiat doughnuts, you could say. The point is that any economic theory that treats !Money as if it were real money is going to have some problems.
Market actors can use money substitutes, and they often choose to do so, voluntarily. The professional economist class would like you to believe that the money substitutes themselves have a value that can be separated completely from the underlying money. This is clearly nonsense. I'm not going to spend any time on that. Some of them like to say that the money substitute itself is money. Also, nonsense.
Others will tell you that money is simply a medium of exchange and that it has no value intrinsically. If we are talking about Fed notes, that is true. Fed notes are !Money. If we are talking about real money, however, it is not. Again, the point is that we don't use real money, so any economic theory that pretends we do is going to have problems. An economic theory that recognizes our !Money as !Money will do a better job of explaining how the !Money works. That economic theory is Modern Monetary Theory. Hopefully, one of their proponents will join me in the debate offered at the link at the top of the page.
Along the way in our glorious Republic (I can't even type that without laughing), our money substitutes becames substitutes for other money substitutes, rather than for money itself. This, obviously, is a nonsenical arrangement. Some call this an "operation reality." Maybe so, but it's worth pointing out that it makes price imputation quite difficult.
Perhaps you don't know what that means - price imputation. Well, we can talk about that concept if you'd like, but I'm ready to bring this blog to a close.
Qatar Wins the World Cup
And I don't care. =D If I'm still here in 2022, I've got other problems.
David in Qatar
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