Friday, February 22, 2013

The Great Debate


Ok then.   So the previous post generated a rather enormous amount of questions and accusations.  Some of them very legitimate... others so amazingly stupid that the author should be banned from the internet forever.  I will do my best to address the ones that I feel were the most important so as to shed as much light on my position as possible.

Raggededge: Owning 3 cars does not allow you to lend out 30 cars. This is what banks do with fractional reserve lending. In the banker world, if you filled one of the cars with tannerite and blew it to kingdom come, the bank would then only be able to lend out 20 cars. If we accept the premise that credit = money, we have just seen the money supply reduced

No.  if we accept that credit is money in your scenario... money is growing slower.  Not decreasing.  Growing slower only equals a cut if you're a democrat... or you went to Harvard Business School and are therefore functionally retarded.

From Josh: Nate, would you define inflation solely as the increase in the supply of money? Or would you define it as an increase in the supply of money and credit?

Only money.  Credit is not money until its spent.  Its a mechanism for introducing money into a system.  Its like saying a door is a crowd... because the crowd walked through the doors.   No.

ODG says: I thought that your view was that debt != money? How then can lending (ie debt) deliver money to the system?

Because it becomes money when it is spent.  Fed creates an FRN from thin air... gives it to bank...  its not money yet... bank gives it to you...  its not money yet...   you by a car with it...   now its money.  Now its in M2.

Athor Pel: In a debt backed fiat money supply, can all debt ever be paid back?


Joshua_D : Aside from the technical aspects of transferring a CD, I don't see why a CD could not be used as money. I have a car, you have a $3,000 CD, you sign the CD over to me, I sign the car over to you. Done deal.

Yes.  You could also give me a my little pony that you said was worth $3,000 and it would be money too.  But if I intend to sell the my little pony to get the money for it... that's an additional transaction.. so its not money.  Just like the CD.  It could be money... or it could be an IOU.

Joshua_D: Also, your gambling analogy falls short. While the little ball is spinning, there is $40,000 of your money on the table and the whatever the house plans to pay if you win. You money and the house's money is in the money supply, you are just wagering over who gets to keep the money.

Mate...   if the casino wins the chips do you get to count them in your money supply?  No.  You didn't understand the analogy.  I suspect most folks missed it.  In the Analogy your wallet is the money supply, and the Casino is an international banking cartel.

again... from Joshua_D : I mean, you claim that debt isn't money, but we all know that our current money system is a debt-based system, and our money has to be borrowed into existence.

This is important folks so pay attention.  What our current money system is based on literally means nothing.  What money is based on... also means nothing.  All that matters is that people  accept that it can be used as an exchange medium.  Anything can be money.   Anything.   until you grok that... you're never going to be able to follow this debate.

Jack Amok says: Money is nothing more than a voucher for future goods and services. 

Wrong.  I love Say.  The man was among the biggest of the big hitters.  But he missed a very important point about what makes money money.   I can write all kinds of vouchers...  monopoly money for example... is a voucher for goods and services.  So why isn't it money?  Well it could be... if someone accepted it as money. But people don't.   Why?  there is no why.  It goes back to subjective value.  Ultimately you're not arguing what is or isn't money... you're arguing what is better to use as money and what isn't good to use as money.   I'm just pointing out... it can all be money.  Unless in a transaction an additional transaction takes place to complete the transaction.   I will now blow your mind.   There is a case where even cash isn't money.  If I want Gold... and you give me in stead... 2oz worth of gold... in CASH...  and then I go buy gold with the cash...   in that transaction... Cash wasn't money.   now do you understand?


TZ writes:  Note you did not provide an example of something that IS money, and specifically you didn't say that the now virtually entirely virtual currencies - many are based on debt - is money, but by your definitions they cannot be. Even a physical $20 bill is a zero-maturity treasury bill. You cannot exchange it for anything useful.

come on TZ...  I gave all kinds of examples of something that is money.  I flatly said ANYTHING could be money. What something is or isn't based on means NOTHING.  As for virtual currencies...  Of course they can be money.  NFC is great for this.  you put your phone next to mine...  a bunch of bit coins get deposited in my account...  I give you a cow.    POOF.  Bit coins are money.  See how that works?  Bit coins are money.  PHONES are not money.   Phones are like hands moving gold coins around.   Dig?

BobofBobland demonstrates that he doesn't read or type to well: This is some bullshit. If a bank issues unbacked loans, then it increases the total amount spendable money, which is what, in practice prices, respond. The "realness" of the money that is created is irrelevant. You could very easily argue that dollar bills aren't real money either, as they are also unbacked, but then FTS. Do you really think that if a bank were to issue a loan for twice the current money supply, prices would be unaffected?  And is not our concern over the money supply based derived from our concern over prices and weatlh transfer?

Ciphra Summam asks:  I go to the bank and borrow 250K to build a home. The bank makes me the loan, I use that to fund the construction. Is that money?

Yes.  It becomes money the second you spend it.  What is not money.. is the debt you owe to the bank.


As best I can tell... I am all caught up... and I suspect many of you now realize what I said wasn't quite what you thought I said. Except Bob... who no doubt thinks his comment nailed me to a wall.


SDH said...

Is there a resource or primer you could recommend so that someone interested in following the debate could educate themselves instead of asking stupid questions?

Nate said...

Nate said...

also... I would much rather answer your questions and help you keep up than deal with BobfromBobland...

SDH said...

I'd already grabbed the "Mises on Money and Inflation" pdf from there, I'll keep digging around.

Nice call on the Basil Hayden's, though my liver is not as enthusiastic.

Raggededge said...

I'm going to sip on some Knob Creek and think on credit for a while. I'm leaning toward credit=money, but I'm open to being persuaded otherwise.

Cool Hand said...

. and hey lets count all the money in savings and checking accounts too..

If I can borrow the 250k and spend it building a home and that is only when it becomes money, then you cannot count money in savings and checking because it hasn't been spent yet. I understand the point you are trying to make, but if it can purchase something, as credit can, then it has to be considered money.

Nate said...


Credit is what I call 'potential money'.

You have it available to you .. but you are not using it.

When estimating the money supply I absolutely believe checking and savings accounts should be counted.

Again... the credit card didn't buy anything.

The credit card is just a vehicle for moving money. If gold coins are money.. the credit card is the hand that gives the coins to the cashier.

So... you have a credit limit of 5k.. and you spend 3k on a horse.

3K gets deposited in a checking account somewhere... so yes... that 3k now counts in the money supply. The other 2k (total of 5 remember?) does not.

Until you spend it.

Then it does.

Cool Hand said...

Agreed on the credit card but it acts of a line of credit. Not actual borrowed funds. Hence the name credit card. Only the funds borrowed against the line count. All 250 for my house counts because its now in my bank account, even though I haven't spent it yet. The availablity to access credit does not equate to the use of credit, and its classification as money.
Thanks for the post btw. Travel safe. Carry heavy.

Cool Hand said...

O and by your standard wouldn't checking and savings be considered potential money..its available, just not being used.

Nate said...


Remember... estimating the money supply isn't' the same thing as defining money.

From the beginning I said estimating the money supply was a wild ass guess... and it is.

M2 is a great measurment because when someone spends credit... its accounted for in M2.

Nate said...

As for checking and savings accounts being potential money... they are liquid enough... flowing around enough... that it is reasonable to count them as money in an estimate.

Flannel Avenger said...

Ok, so I am sure you will let me know if I'm horribly off base here, but I have 2 thoughts on the proposed inflation vs deflation scenario.

1) Given the printing of money, and the insane amount of (I guess not-money being counted as money), isn't deflation necessary if one wanted to get the US fiscal house back into order? It's definitely painful, but so is having a broken bone set.

2) Given our current money-printing, are we not setting ourselves up for a country that owns significant amounts of dollars and doesn't particularly like us (such as China) to dump those dollars and push us over the edge into the hyper-inflationary scenario?

Also - safe travels to you on your imminent journey.

Nate said...


Yes. On both counts.

Deflation is actually the cure. Which is why I say Vox is such a hopeless optimist.

Also... the big reserve fund dump is a mechanism that I have been pointing to for some time.

Flannel Avenger said...

Thanks, it's nice to know I'm not crazy.

I think that MPAI has led Vox astray in this instance. I think they know full well what they are doing and are looking to crash the dollar.

Well, that, and from where I'm sitting hyperinflation is like a giant blazing comet hurtling towards us...

Toby Temple said...

People are getting confused by the "money is X being spent. if X is not spent it isn't money" simplification.

I'll give it a shot.

Money is X that is universally valued as something that can be traded for any commodity that is equal or lesser to X in written value.

For example, $100 dollar bill. That is money. You can use it to buy a generic t-shirt worth $8.95 or an Addidas running shoes worth $100.00.

The bill is used to trade for the shoes or t-shirt.(for the t-shirt, you also get $91.05 back). For the shoes, bye-bye $100 and hello shoes.

What about credit card then? You can use it to trade for the same things.

That is not accurate. When you buy an item with a credit card, do you trade the card for it? NO.

You get it back.

The credit card just "writes" a note saying "I borrowed $XX.XX from Bank Y and I am using it to trade for the shirt. The bank will give you the money soon." to the seller. Sellers know this. They view this as cash(or money) receivables.

An actual cash(like a $100 bill) being given to a seller for selling is not cash receivable. Its cash. Its money. No need to do anything else to make it usable for trade.

Nate said...

I think people cannot see simple truth because they have been retarded by keynesian and monetarist machinations for so long.

WhoDat said...

So if I have $700 (cash or credit). Am I best served by utilizing it to acquire a 30-06 Remington 700 or is there something else I should look at?

Cool Hand said...

This still doesn't jive with me.

If I borrow 250K from the bank, forming debt, it goes into my bank account. It's just as liquid as my savings account.

If it is not money yet until I spend it, then savings/checking accounts cannot be counted as money. In fact, there would be no money, until and only when it is employed in a transaction.

What is the basis of liquidity for use as money? Arguably gold and silver are less liquid than cash or credit is in todays world.

Flannel Avenger said...

I believe that the issue comes into play because of the way that many businesses do their accounting. In Accrual Accounting being owed money shows up on your balance sheet the same as having the money.

So, if you go down to Wells Fargo (as an example) and get a home loan for $250,000.00 that debt shows up on their balance sheet as money. It also shows up in your checking account as money (or in the pocket of whoever you bought your house from as money). It's being double counted in the economic system. But it shouldn't be.

That, at least, is my understanding of what is going on here. I am sure that Professor Nate will correct me if I'm wrong.

Jack Amok said...

While there are certainly academic, philosophical debates to be had about "what is money", for the purpose of figuring out if we'll have inflation or deflation, the only workable definition is "anything I can use to bid on goods and services."

If I can buy groceries with credit, then credit counts as money. Anything that gives me "purchasing power" works. If credit has increased people's purchasing power, then credit has been supporting at least some of the current price levels, and if credit shrinks, then purchasing power will shrink with it, unless it's offset by something else (flooding with hard currency), or unless production decreases at an equivalent rate.

Toby Temple said...

If we consider credit as money because it can buy us things, then we can consider sexual favors money as well.

Jack Amok said...

Whatever drives up the price Toby, whatever drives up the price. That's all that matters for inflation/deflation.

Toby Temple said...

Whatever drives up the price Toby, whatever drives up the price. That's all that matters for inflation/deflation.

Inflation, as defined by Vox and Mises, is the increase in the supply of money.

So we need to define MONEY.

Unless, you intend to provide a different definition for the terms INFLATION & DEFLATION.

Nate said...

Here's where you're getting confused...

The principle of the debt... the part that is actually used to purchase... or that goes into your savings or checking account when the loan is completed... counts as money.

The debt you owe to the bank does not.


The money you get counts... the numbers the banks has as "accounts recievable" does not count as money.