Wednesday, March 06, 2013

The Great Debate: Fiat? or Shenanigans?

You.  Whimpering in the corner.  Suck it up and get back on your feet.  You knew the US money system was a wreck or you wouldn't be reading this debate in the first place.  So Vox and I conspire through competition to show you precisely how wrecked it is... and at the first glimpse you curl up in a little ball.

Man up.  Its not going up hill from here.

Setting aside the obvious difference of opinion that we have (he's wrong by the way which I will presently demonstrate with no little amusement), our view of where we stand in the grand scheme of things is profoundly similar.   If you look carefully... you'll see that I was the one that dropped the bomb... not Vox.  Vox just stepped back and said.. "did you see that bomb he dropped? Say boys... That's a big freaking bomb.  I doubt even he knows how big a bomb he just dropped."  Then, being the cruelty artist he is, he explained the bomb. Then you realized...  "Oh damn.  There's a bomb."

You see why this debate is important?  Its the format.  The format itself allows you to accept things that you would otherwise refuse to believe.  That's why... in spite of the enormous time investment it requires... I cannot simply quit.  That...  well...  and the fact that every once in a while I'll get to do this...

Remember I said our money was fiat money... with characteristics of credit money.  Right?  Vox says I am wrong about that.  And... while I considered rushing off to donate some money to an unrelated charity in his name and make a video about it...  instead... I just decided I would address his well made point like an adult...  mostly...

Vox said:

"Nate's first mistake is the identification of credit money as fiat money, even though he clearly has his suspicions concerning the problematic nature of the distinction as it applies to the US monetary system.  That this distinction is false can be demonstrated in two ways, first with a legitimate appeal to authority and history, and second by the money creation process."

He then provides a quote from Mises, that I agree, does indeed say that fiat money doesn't yet exist and probably hasn't existed.  Vox appeals to Mises who appeals to history.   And Nate points out... well shit...  this book was written in 1912...  it appears we have some more history to investigate before that holds water doesn't it?  Well lets look at this new history then... especially... recent history.

Say what does our buddy Murray have to say about fiat money?

"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guar­antees to furnish paper money to redeem the banks’ demand li­abilities. These and similar devices remove the market brakes on rampant credit expansion."[4]





Are we done?

No... no no no... we're along way from done.   Remember.. Mises characterized fiat money by legal privilege.  Legal Privilege?   Consult the MisesWiki!


According to Hülsmann[5], there are four groups of legal privileges granted by the state (usually more than one is granted):
legalized counterfeiting - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details.
monopoly - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others.
legal tender is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to Gresham's Law.
legalized suspension of payments allows banks to avoid paying their obligations, while receiving payments from their debtors. If a bank is freed from contractual obligations to redeem its money and it is also legal tender, its banknotes become genuine paper money.
With legal privileges are the banks allowed to behave more irresponsibly, which increases moral hazard.

Now are we done?

Well... not really.  Because what I've done here isn't intellectually honest, in the sense that I have not represented the whole of Vox's point.

The reason I hated Chapter three is not because of confusing terms like fiduciary media.  Its because Credit Money itself is a category error.

Credit money is a description of leverage. But...  Leverage can be applied to all types of money....  Thus... Credit Money... is a subcategory.  Credit Money is what happens when you take money of any other type.. and then leverage it up for lending purposes.

I am going to be as clear as I can be...  you may need to go back and re-read my last post on this... but I will  try to explain again.


Leverage is something that happens to Money Types.  It isn't a money type itself.  Its like including cancer cells in a discussion of  human  cells because they form in the human body.  Cancer cells aren't human cells.

We must always go back to competition.

Money is money because of the constant commodity competition   Every day the competition is on going... and every day one commodity is winning.  that one commodity that is winning... is the money.   The money types... are explanations of WHY the competition is being won.  Fiat money is fiat money because the government helped it win artificially and it wouldn't have won otherwise.  Take away the government advantage... and its not the money anymore. Commodity money types?  Well they have no artificial government advantage.

That is the true definition of sound money.

Its money that wins the competition... every minute of every day...  the on going competition... not some past competition .. on its own without aid of the government.


All modern paper currencies are fiat money.

The bits that are loaned into creation from thin air?  Those are credit money too... but it is dishonest to ignore the fact that it is fiat money as well.  Loans may have created the individual dollar bills... but those dollar bills wouldn't be money... if it wasn't Fiat.

May God have Mercy on my soul...   Ludwig Von Mises... was wrong.  You cannot disregard the fiat nature of the original money... just because most of it was created through leverage.

So Fiat?  Shenanigans?

The answer is both.  Not one.  Not the other.   Both.  To fail to grasp that... will totally blind you to the inherit problems of our current economic system.  The money is fiat money and credit money.. because much of which was created via leverage... but also much of it was created through counterfeiting.   This is why I created the word "clusterfutastrophe" while attempting to parse the US money supply.

Its not that there is no money.   I already explained that there is always money.  Money...is like energy.  It cannot ever be destroyed.  It can change forms... its velocity can change.  But it cannot be destroyed.  The problem is... our system is so screwed up through fiat and leverage... that we can't even measure the money supply any more.


Come Vox... be sensible... you're absolutely right to point out that the leverage can't be ignored... but you were wrong to suggest that the fiat aspects can.

Now tell us Vox...

What IS the best way to measure the abomination posing as the US money supply?  He asked knowingly...


*** PUBLIC SERVICE ANNOUNCEMENT***  I want to apologize for using Credit Money as a type of money in my last post.  I knew full well I didn't believe it to be an actual money type while writing the post... but because the way Vox asked the question... and because we are debating on Mises' turf... I felt I had to.  I do not believe anyone would've taken me seriously if I didn't.  First I had to demonstrate that i did understand the Misean terminology... otherwise I wouldn't have any credibility on the matter.  Regardless it may cause confusion.   If Vox chooses to score some points by saying, "hey wait.. first you said credit money was a type of money then you didn't" I concede those points willingly.

54 comments:

foxmarks said...

When you argued last time that a given “money” can be (and is) defined by more than one category, the whole thing became much more clear.

+1 to all the comments saying this debate is more usefully instructive than most of what I suffered through to get an econ degree.

Peter Garstig said...

Lovely Nate, just lovely.

Josh said...

What IS the best way to measure the abomination posing as the US money supply?  

Now we're making progress.

Nate said...

We're only making progress if Vox allows us to proceed.

Josh said...

Right. I think there's going to be several more back and forths on credit money, money surrogates, fiat money, etc.

Vox does have an advantage going forward inthat he can actually point to a way to measure his definition of the money supply. Or at least I assume he does.

IM2L844 said...

Thank God, Nate and Vox that somebody is finally making this crap interesting. If this keeps up, I may stay awake long enough to actually learn some stuff and retain it.

Stilicho said...

Nate, how did the very first FRN come into being after the Fed was created and granted its monopoly?

Josh said...

Nate, how did the very first FRN come into being after the Fed was created and granted its monopoly?

Exactly.

Res Ipsa said...

“Commodity money types? Well they have no artificial government advantage.”


I’ve gotta ask for your take on this. Gold/silver are the two best known commodity monies. Gold or silver coin minted by a government guaranteeing a fixed weight and quantity of metal, are in fact given government advantage. Fixed weight, quality, and legal protection from devaluing or defacing the coin are all “artificial advantage” over privately minted coin. In a modern money system like ours, only official coin would redeem ETF transactions, so the advantage is significant.

With that in mind, is government sanctioned money really an issue, provided it is based on factual weights and measure? In your view is there anything wrong with a money system that functions within those perimeters?

Flannel Avenger said...

This is certainly the most entertaining debate I've seen in a long while

Nate said...

"Nate, how did the very first FRN come into being after the Fed was created and granted its monopoly?"

Fraud.

Nate said...

"With that in mind, is government sanctioned money really an issue, provided it is based on factual weights and measure? In your view is there anything wrong with a money system that functions within those perimeters? "

yes. That unfair advantage matters a great deal.

Mises himself was ok with it though... so I suppose I can be too.

ODG said...

"Credit money is a description of leverage."
"You cannot disregard the fiat nature of the original money... just because most of it was created through leverage."
"The money is fiat money and credit money.. because much of which was created via leverage"

I fully admit I'm not the sharpest tool in this shed, but it sure sounds to me like you're saying credit is money. Which is what you said wasn't money.

My head hurts.

swiftfoxmark2 said...

Nice reference to Rapey McRaperson at the beginning there.

Stilicho said...

You say fraud, I say leverage and we are both correct.

Jay said...

Regarding Murray's comment on bank bailouts/deposit insurance and runaway credit expansion, I'm curious on what an appropriate market response would be to bank failures (if any).

Bank bailouts obviously encourage bad behavior but bank failures have their own set of problems, especially if widespread.

Also, not sure why you guys need to feel the need to keep apologizing for this series, this is edutainment at its finest. If I wanted shallow uninformed drivel I'd go to Fox or CNN.

Salt said...

Fiat money is fiat money because the government helped it win artificially and it wouldn't have won otherwise. Take away the government advantage... and its not the money anymore. Commodity money types? Well they have no artificial government advantage.

That is the true definition of sound money.


No problem.

Currently market prices on all various commodities are inclusively holding within non-sound money (fiat if you prefer). The stock market is rising due to artificial government imposed advantage. Housing rose due to government imposed advantage.

Being as this is ultimately an inflation/deflation debate, when that artificial government advantage is withdrawn should we see inflation or deflation? It's axiomatic that the money supply, which is currently inclusive of government advantage, will fall as it's illusionary.

Remove the illusion and what remains? More or less of what the markets currently operate on as declare money?

Makes me ask how Weimar happened at all being as apparently no one wanted the illusion and when forced to participate dumped as fast as possible (velocity went through the F'n roof). What makes us different from Weimar?

My question for you, Nate, is whether the FED/PTB whatever can force the illusion as it apparently is failing to do so.

Nate said...

Salt... you're very close... but you have it precisely backwards.

When people no longer selectively value the money forced on them...

what would happen to prices... demoninated in that now valueless money?

Nate said...

Jay,
The proper response is... none.

Nate said...

Stilicho

Its fraud because the dollars folks already owned stopped being dollars... and started being FRNs.

There was no "first FRN".

They just stole everyone's money and replaced it with fake money... but they did so in a very subtle way.

BigWheat said...

The money is fiat money and credit money..

So, is it possible both you and Vox are correct, and we could see deflation along with hyperinflation? Perhaps in different Money Types?

Salt said...

Nate, I wish you to consider something, especially in light of a comment you made at VP -

its even more interesting if you consider that the compeition you're referencing... is actually going on right now... already.

There is competition, but not within competing monies but in competing true safe havens. It's not the Dollar that is bad, but the government imposed advantage (itself being inflationary) people are preparing to weather the implosion of.

This is where I see your error -

When people no longer selectively value the money forced on them...

It's not the money, but the government intervention (advantage) people are no longer buying. Not that many wouldn't, but - and here's the difference - they just cannot afford it. Bernanke is trying to sell what cannot be bought.

In an offhanded way, I'd say people are not willing (can't afford) to part with Cash (being King) for the offered illusion.

When the illusion goes bye bye, Cash will rear its head. Loss of the illusion will be deflationary.





tz said...

Typo?
"You see WHAT this debate is important?"

If you want an ironic definition of "sound money", hold a 90% silver US coin (from before the debasement) and a current one. The older one rings true.

If the Fiat - Chrysler deal goes through with stock, what kind of money?

Now to a real question/comment:

If both Gold and Silver are being used as "money", and

Money...is like energy. It cannot ever be destroyed. It can change forms... its velocity can change. But it cannot be destroyed.

is a change of value (e.g. the Comstock Lode or the Cyanide process changing the supply) not creating or destroying, or what exactly are you getting at? If it changes form, does it "teleport" from who was holding the old to the new (FDR's seizure and ban of Gold)?

If it isn't pushing, I assume "Leverage" only transfers money, but doesn't create it (as per the earlier pinwheel/check kite discussion earlier). I.e. you can create a big illusion of money with a huge and fast moving pinwheel, but the money (if any) is only the bit crossing at the moment and might even shrink while the pinwheel gets bigger?

BigWheat said...

It's not the money, but the government intervention (advantage) people are no longer buying. Not that many wouldn't, but - and here's the difference - they just cannot afford it. Bernanke is trying to sell what cannot be bought.

Why cannot it not be afforded, would the price in dollars be too much? If so, this would seem inflationary.

When the illusion goes bye bye, Cash will rear its head. Loss of the illusion will be deflationary.

What if the value of credit monies deflates, but cash still has the advantage (at least not that created through counterfeiting), but one just cannot obtain enough it to buy anything?

Nate said...

DAMMIT

Thanks TZ

Fixed.

tz said...

Who cares about the donation and video, we need a creepy demonic mascot in an unnatural color and species. Is there some Lovecraft clipart available?

Salt said...

@BigWheat

It was reported yesterday, via Zerohedge, that most of the DJIA rise has been bought with margin. That's like taking out a loan hoping your pony will come in at Pimlico.

Not sure if you have noticed but people are tapped out; Only suckers take out a loan to play at the tables in Vegas.

If what Bernanke is selling could be bought, why is credit still shrinking? If it could not be bought when the price was lower on what basis is it a better deal now?

Currently it is inflationary (not hyper) but for every point of inflation the government buys the price gets much much higher. Soon it won't be able to buy it at all. And people are not stepping to the plate as Bernanke was hoping.

but one just cannot obtain enough it to buy anything?

Might have been Willie Sutton who said, when asked why he robs banks, "That's where the money is".

Roundtine said...

The way I see it is that if existing non-credit money replaced credit money, it would need to have velocity off the charts because there is so little of it. Due to its high demand and low quantity, only a high price would induce holders to sell it and transact in it. I grant that they could print physical FRNs, but we'd need to see a big uptick in the Fed's currency budget and new higher denominations.

tz said...

@Roundtine

To risk jumping ahead a few steps, the "money substitute" (or leveraged) "pinwheel" - the series of kited IOUs (checks) that only have value because it is a pinwheel is the "credit money" you speak of. When you hear Ben Burnthecurrency announce they are buying a $500 billion EPA Superfund Site, oh I meant financial toxic waste MBS, they are attempting to do exactly that - keep the pinwheel going.

A Pinwheel explodes/implodes (that is the question at hand, inflation/deflation) the moment A SINGLE LINK IN THE KITED CHECK CHAIN BOUNCES. That is how Lehman blew up AIG and the rest of Wall St. There were many places that depended on having the Lehman kite-checks be available to pass on to their "creditors", which eventually would make it back to Lehman.

IIRC, Portugal sent them Gold in some actual form and it all went "poof". The gold didn't cease to exist but was sold forward, shorted, leased, or whatever, so wasn't in Lehman's hands, nor could anything be done in Bankruptcy.

Look and read in horror at MF Global, but realize that was just a point failure which was not at a systemically critical node in the network. The financial system is like a dozen people (recalling the whitehouse meeting with Paulson) standing knee deep in gasoline playing with matches.

Having gold will not help if you can't exchange it for food and you are starving.

Having guns won't if there is no one even to rob for food (assuming you aren't into cannibalism, but given the current decline of society I should check my low-carb pork rinds to insure they aren't of the long variety; remember what is going on with horses in europe; Mrs. Lovett's [Sweeny Todd] Burritos could employ those from south of the border, solve both hunger and immigration, in a Soylent Green sort of way).

Nate said...

people people people...

You know how the system works. Good for you.

But do you know how many times we changed the system almost completely between 1800 and 1900?

The whole damned monetary system some times changed... president to president!!

You think you can argue an outcome based on something as silly as how money happens to get into circulation in this particular system?

REALLY??

Nate said...

You guys are forgetting a few really key factors.

1) Those in charge... in their hearts are Keynesian. They actually believe... inflation is good. Not bad. To them... deflation is WAY worse. To a keynesian.. deflation.. is DOOM.

2) Inflation works in the short term. so... TPTB... can create a bunch of money... dump it into M2 via government spending... and ***POOF*** inflation. IE... they can announce a minimum income for american citizens... monetize the debt to pay for it... and inflate that way as well.

Against the rules you say?

Rules????

RULES????

What freaking world do you live in?

There are no rules.

Nate said...

and.. on top of all that... the big threat of hyper inflation... doesn't require any of that to happen.

in fact... the whole debt delivery system could break down completely.. and we can have hyper-inflation... with out one new cent.

Toby Temple said...

Great comeback, Nate.

Credit money is indeed a subcategory, primarily a subcategory of fiat money.

tz said...

and.. on top of all that... the big threat of hyper inflation...

Do you mean in terms of money or an unhappy medium, fiduciary?

tz said...

2) Inflation works in the short term. so... TPTB... can create a bunch of money... dump it into M2 via government spending... and ***POOF*** inflation

Or they can simply tell banks, well, we insisted for every $10 of loans you reserve $1, now it is for every $20...

This involves no government spending.

(Sorry to poke, but it is a point)

tz said...

@TT, re: subcategory...

Yes, like subs, they are underwater, under pressure, likely to be torpedoed and will lose all hands.

Nate said...

"Or they can simply tell banks, well, we insisted for every $10 of loans you reserve $1, now it is for every $20..."

Indeed they can. In fact... not long ago the Fed was openly talking about eliminating reserve requirements entirely.

ENTIRELY.

No deposits necessary to lend.

Doom I tell you. Total fucking DOOM.

And I know... people think... Inflation will kill the fed! Of course it will. But what is the point of the fed?

The fed exists to protect the interest of a small group of people. Inflate enough to give them time to bail out... then inflate more to give the next guys time.. and on and on..

But it doesn't matter. The inflationary blow up won't actually come through new money.

It will come when everyone up and decides they don't want dollars anymore and american are left holding the bag.

Nate said...
This comment has been removed by the author.
Stilicho said...

ENTIRELY.

No deposits necessary to lend.

Doom I tell you. Total fucking DOOM.


either you are being sarcastic, or you've completely disregarded what you learned from Keen re: the relationship of reserves to loans.

I see that you are now back to denying credit money. Interesting.

JartStar said...

Take a look at the Chinese residential real estate market. It is so bad that even 60 Minutes is talking about it. There's a government change in China right now, but in the next year this debacle will have to be dealt with one way or anther. Likely scenario from China: inflate.

Nate said...

"either you are being sarcastic, or you've completely disregarded what you learned from Keen re: the relationship of reserves to loans."

Or there is a process that you do not anticipate.

Stilicho said...

Or there is a process that you do not anticipate.

Saving your powder for Vox? If so, that's fine. I'll go back to waiting.

Slowpoke said...

Don't let Vox deceive you,there's quit a few of us following this. I think I'm groking what you and Vox have written. Haven't spoken up because when the adults are talking its rude of the children to interrupt.

I really hope this continues; I'll be pissed if something comes up and Vox or you can't continue.

Thanks for the work, i'm learning as much as I did in my whole macro econ class.

tz said...

For example:

http://market-ticker.org/akcs-www?singlepost=3153978

As I noted:

A Pinwheel explodes/implodes (that is the question at hand, inflation/deflation) the moment A SINGLE LINK IN THE KITED CHECK CHAIN BOUNCES.

Too Big to Fail is a misnomer. It is not largess but if it is a systemically critical node in the pinwheel.

Therefore, the banks can launder $100 billion so the Mexican Cartels can buy anti-tank weapons, fund a DNAFTA "Chunnel" under the Rio Grande, and pay to assassinate US Citizens, yet doing more than extracting a few dollars (The Fed will supply in exchange for worthless toxic derivatives) will blow it up, so it will NEVER happen.

Susan said...

I second Slowpoke. Educational on many levels.

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