Thursday, February 21, 2013

The Money Supply

It appears to me that there seems to be a bit of confusion out there about what the money supply is doing.  Is it growing?  is it shrinking?  Inflation?  Deflation?  Stagflation?   Obviously I am a hyper-inflationist...   Our buddy Vox is a deflationist.  So what gives?  Does it matter?

Well... if we're going to talk about this we're going to have to establish some kind of basic vocabulary.  For example... what is money?  I know... you're thinking dollar bills and coins.  Yes and no.  Money is an exchange medium that is used to complete a transaction.  The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange.  You got your money... and that's good enough.  Lets look at gold for example.  Gold is money.  It always has been money.  You want some of my cattle... you give me a small amount of gold... and we're done.  Modern cash is similar.  You give me cash.. I give you a cow or two... we're done.  Cash is money.

What about debit cards?  I swipe your debit card... I give you cows...  we're not done.  Your bank has to send money to my bank.  That's an additional transaction.  Debit cards aren't money.   Same for checks.  Checks aren't money either.  They are IOUs for money.

Diamonds.. Silver... Paper... Copper... all of these things can be money... if they are employed to complete an exchange.

Are we good here?   Questions?   No?     Ok then.

Now that we know what money is...  what do we mean by money supply?  Ok well now things get tricky.  Obviously money supply means... the amount of money out there.  And we know what money is.  But how do we go about measuring it?   Well... if we're being honest... the professional economists term would be for the process would be a "Wild Ass Guess".  There are all kinds of problems in this sort of business... and most of them stem from the process of figuring out what to consider money and what not to count as money.  Obviously we count all the hard cash...  and hey lets count all the money in savings and checking accounts too.  What about other things though?

CDs for example.   Are CDs money?   Well no..  I mean if I say I want 500 bucks for a cow... and you offer me a CD for 500 bucks... is that CD money?  Well I have to go cash that CD in for the 500 bucks.  So no... its not money.   But Nate!  Its just a certificate of deposit!   No.  Its an investment.  Its gambling.  You're asking me to accept a voucher for a bet as money.   Nope.  Not happening.

So... test time.

You pay 200,000 dollars for a house. 2 years later a real estate agent tells you that your house is worth 250,000 dollars.   Another year later... an appraiser tells you your house is worth 300,000 dollars.

Has the money supply increased by 100,000 dollars in the last 3 years because of your good fortune?

No.  It hasn't.  That's not money. Its what I call potential money.  It doesn't exist.  It could exist under the right circumstances... but as of right now... it doesn't exist.

And... conversely... when that value goes down...  that isn't the money supply shrinking either.  Because you can't lose something that never existed in the first place.  Savvy?

I'm going to offer an analogy.  You're at a roulette table.  You have 1000 dollars in chips on the line.  You win... and you just add your winnings to your bet.  You do this till you are betting 40,000k.

While the little ball is dancing on the wheel... deciding where it will land...    how much money do you have?The answer is none.  You don't have any money at all.  Your money is on the line in a gambling venture.

That's investment.  That's why investments aren't money.  They are just gambling with varying degrees of risks.  And what is debt?  Debt is investment... or gambling....  its one party gambling that another party will pay back more than was originally lent.

Now that we know all this...  can you start to see why Deflation is not in fact happening?  Because Z1 measures debt... and...

Debt is not money.

 No amount of debt disappearing can ever be considered deflation.  If inflation and deflation are respectively the number of horses going up or coming down... then an increase in horses cannot be offset by a decrease in cows.  Cows aren't relevant to the measurement.

What we are seeing is inflation.  The money supply is exploding.  Yes... debt is disappearing...  yes... that is painful to an economy...   its just not deflation.

***UPDATE***   Bloody hell!!!!   Look I didn't expect this and its a rather piss poor time for me... what with the fact that I am leaving on some grand adventure in less than 24 hours and I will be gone for several days.   Pile up your questions in the comments.  I will address as many as possible tonight...   in the ATF post?  oh dear God...


Raggededge said...

If money enters the money supply through debt, wouldn't it stand to reason that a decrease in debt reduces the money supply?

Nate said...

No. Because debt isn't money. Additionally... money enters the money supply in other ways besides just debt.

You're basically arguing that gaining less is shrinking.

Its not.

Unless you're a democrat.

Lulabelle said...

Ok, I've got a question......and yes, I'm fully aware that my question illuminates my moron status. (but I'm trying to learn, so I've to ask). Here goes: Why do we even care how much money is "out there"? What purpose does it serve to evaluate the money supply?

Nate said...

That's actually no a dumb question at all.

I know you'd probably prefer me to give you a difficult, but understandable answer that allowed you to accept the fact that it is done.

Unfortunately I think its a waste of time too... trying to track unemployment is also a waste of time.

All of these things would just work themselves out if we would leave things alone and stop mucking about.

But we can't leave things alone. We have to muck about.. so we imagine tools to justify our mucking about.

And here we are.

black said...

On an individual level, "money supply" affects how many groceries you can buy with the dollars in your wallet.

I'm not an econ major, but am also trying to piece all this together and how it will affect my family.

Welcome back, Nate. I missed your insights while you were dating Facebook.

Lulabelle said...

Nate was absent cause he was on Facebook?!? Gay squared. Gay with a side of gay. With cream gay on top. With a sprig of gay. (eh, too lazy to go get the actual quote.)

Lulabelle said...

"so we imagine tools to justify our mucking about."
I bet that is very close to the truth.

Nate said...

Its true Black. An out of whack money supply is a nightmare. But if we're not mucking about with it... it doesn't get out of whack.

We get it out of whack by artificially lowering interest rates and such.

black said...

Can't remember exactly where I read it, but...

Inflation is something the government purports to be normal, where the truth is that it doesn't have to even exist. With the exception that our current monetary system requires constant growth.

And as Nate points out, muddying the waters in the terminology and substance of benchmarks goes hand in hand with actually altering the components. Obfuscation is king.

And a little obfuscation goes a long long way with an econ-illiterate population.

SDH said...

What's the relation between labour and money supply?

If money is used as an exchange medium for goods and services then the total amount of money should be roughly equal to the total goods and services produced, shouldn't it?

If less people are producing, then we should be seeing the money supply decreasing.

Nate said...

Labor has nothing to do with money supply.

Its totally unrelated.

You also simply cant say "when we produce more... or less..." because what you produce matters. You can produce billions of expensive things that no one wants and you won't have done a damned thing for the economy.

Objective value doesn't exist. Not for products... not for labor... not even for money.

SDH said...

Maybe I'm thinking too simplistic. I was only thinking of products that were actually useful/wanted.

I was thinking if money was used to replace items for barter, then there must be some kind of relationship between those items and money, i.e. the total value of the items must relate to money supply.

If it's not painfully obvious, I know nothing about economics.

Nate said...

Ok... lets start at the begining.... and this should really be its own post but I dont have time right now...

The notion that the money supply should equal the total of goods and services is a bullshit keynesian concept that has no basis in reality.

The money supply is regulated by the supply and demand for money. The price is the interest rate of loans.

When people need more money... they borrow it... and lending is an important delivery method for getting new money into the system.

So no... production... goods services... doesn't mean anything.

well... unless you're a monetarist or a keynesian or a commie. Then it means everything.

Josh said...

Okay, so, here's my comment representing the deflationist view. Note that we still haven't seen deflation, since the deflation in the private (mainly financial) sector has been offset by massive government borrowing. So the deflationists aren't saying that we are currently experiencing deflation, but that we will experience deflation. your previous example...

Someone buys a house for 200m. They borrow that money from the bank. Let's say they borrow 100% of it, so that we can use nice round numbers. So now 200m has entered into the money supply.

So...the bank has created 200m in loans for the get that 200m, they can either fund it from deposits or borrow it from the Fed.

So...what happens when the credit markets stop expanding? Or, even worse, start contracting? The bank has lent out 200m to a homeowner so they can purchase a home...and presumably to many other those loans are defaulted on...the bank becomes capital constrained...and since they owe money to the fed, they need to raise capital either by selling collateral, usually for less than they anticipated, triggering more collateral calls with their creditors, or weakening their asset base...

When you have a bunch of banks decreasing their portfolios, that reduces the available credit that has been extended so banks can post collateral and repay their creditors. The money required to shrink the pool of available credit comes out of the money supply (because it is no longer available to be lent out). And because of fractional reserve banking, each dollar of credit defaults results in a ten dollar reduction in available credit, and thus a reduction in the money supply.

N.B. This analysis was written after the consumption of a rather large amount of Shiner Bock, so take it with a grain of salt.

Ridip said...

Going a bit OT here, but...

I've been considering buying a quantity of silver and researching how best to do that, bullion, coins, EFT's, etc. I'm leaning heavily toward the first two, because I'm not convinced EFT's are worth dick if it all goes North.

Not having much experience in this area, lets say I sink quite a bit into hard Ag and later decide to use it as payment on a home and property. How do I convert that back into something that will be accepted as payment for said property? And will I take a bath on the exchange if the SDNHTF and silver stays about the same price.

Sorry for the OT but my wealthy friends have all died and all my relations are shit with money so I can't discuss it with them. It's sad to say I'm in the best shape of any of them and yes I'm one of those that should have bought gold at $300, but had nothing to buy it with.

And a second stupid-ass question. Given the econ am I better off buying Ag or paying off my remaining debt? If ya can't tell I don't take Dave Ramsey as gospel.

Toby Temple said...

Let us say that there is 200M cash.

Then the government prints 100M cash.

Did the supply of money went up by 100M?

If yes, isn't this scenario an inflation?

And nice blog you have here, alphaboy.

Giraffe said...

A question Nate.

In what way is debt disappearing painful to an economy?

Toby Temple said...

@ Josh,

The 200M cash is still there. It did not vanish. So there is no ACTUAL decrease in the supply of money. The bank suffers financial loss. It still did not change the fact the the 200M cash is out there.

For example, there are 3 cars. And I happen to own all 3. Then you asked me if you can borrow 1. I said yes and lend you 1 of the 3 cars. Then you decided not to return the car. Does it change the number of cars? No. I doesn't. The number of cars is still 3. I just physically do not have all 3 in my possession.

Raggededge said...

@Toby Temple,

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.

Nate said...


The same way a shot of medicine may sting, but is ultimately good for you.

the hurt is superficial.

Josh said...

What ragged edge said, Toby.

Josh said...

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?

Anonymous said...

That's a very helpful description. Thanks, Nate.


ODG said...

Nate said: "When people need more money... they borrow it... and lending is an important delivery method for getting new money into the system."

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

Athor Pel said...

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

Toby Temple said...

@Ragged Edge,

Not with my example.

But fractional reserve lending is like lending non-existent 30 cars.

Joshua_D said...


I think you need some better analogies and evidence to claim that debt isn't money.

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.

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.

The best example of what isn't money is your home example. A home that is appreciating in value isn't money; however, a valuation isn't part of the money supply to start with.

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 exsistence.

Kentucky Packrat said...

On an individual level, "money supply" affects how many groceries you can buy with the dollars in your wallet.

This isn't true. The US Dollar is a commodity, just like wheat, maize, or pork bellies. It's possible that a bumper wheat crop will cause a drop in the value of wheat versus the dollar, or it could happen right when a new market for wheat opens (a fad in shreaded wheat cereal, for example), and the new demand soaks up the new supply. It's also possible that demand drops without changes in supply, like Krispy Kreme in the face of a low-carb diet craze.

The increase in the money supply can be one reason why the value of the dollar versus commodities goes down (i.e. groceries cost more), but it's not the only reason. It may be that the holders of the dollars that do exist value something (ANYTHING) else more, and are willing to pay more for stuff.

IMHO, the reason that prices are going up now is that the US dollar is being intrinsically devalued because of the credit explosion in our economy, especially in our government. Our creditors don't trust us to give them dollars back if they put them into our banking and bond systems, so they would rather part with them than keep them, and want more of them for the privilege of accepting them for their stuff.

If you define Z3 as money, then we're seeing near-hyperinflation. If you see Z1 as money, we are suffering stagflation. Not a lot of difference at WalMart.

Kentucky Packrat said...

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.

The issue here is that the CD is a promissory note, not cash. The CD says that the bank promises to deliver Y amount of money at Z time. The bank usually is generous enough to offer (Y-a) cash on early withdraw, but they don't have to. Also, if the bank goes belly-up, you could lose some or all of that money. (Again, the FDIC and other insurance can effect this, but it's still insurance, not cash in hand.)

While I tend to lean towards Vox's definition of money instead of Nate's, there's no doubt that CDs are NOT cash, right now.

Unique aside: bank notes were originally the equivalent of instant CDs: a promise by a bank to deliver X dollars in gold or silver. Since a bank could go under, a bank note could masquerade as Z1 money, but was really Z1.5 or Z2. It's only the final transition of the Fed to the state bank that bank notes and paper finally became Z1.

Jack Amok said...

Since his name came up on Vox's blog recently, I'll invoke my version of Say's Law: Goods and Services are exchanged for Goods and Services.

Money is nothing more than a voucher for future goods and services.

In that way, it's very much just another form of debt.

Let's say I give Nate a $100 bill for a case of his moonshine. Nate can give that $100 bill to Buford in exchange for a case of ammo. The transaction was basically Nate exchanging a case of moonshine for a case of ammo. The $100 bill was just an intermediate step - it does Nate no good until he exchanges it for something else. In that way, it's no different than a $100 check from me.

What is different about a $100 check is that Buford probably won't take my check from Nate. Nate has to go to the bank first and transform my check into a check from Uncle Sam, er, I mean a $100 bill.

The question is, will the bank take my check? Maybe, probably. At least in normal times. But if the bank goes under, maybe the can't cash it. I'm gambling on the bank remaining solvent when I stick my money in it. Nate and me both are gambling that the check can be converted to dollars.

Likewise, Nate and Buford are gambling that the $100 bill can be converted into services.

Ultimately, there's no fundamental difference. It's just a difference of degree - is the check or the dollar bill more likely to be honored?

Joshua_D said...

there's no doubt that CDs are NOT cash, right now.

CDs may not be cash in that they are not "Federal Reserve Notes", but I don't see why they would be precluded as money, i.e. a medium of exchange. I'm exchanging my car for your CD. What does it matter if I lose the CD later on in a bank default?

Also, today's "cash" is "notes" as in Federal Reserve Notes. Except today's Federal Reserve Note is not backed by any real money, right? It seems silly to claim that FRNs are "real" money and CDs are not "real" money.

In any case, Vox and Nate will certainly need to decide on what is and isn't money before getting to the inflation/deflation debate.

Joshua_D said...

Very good point, Jack.

tz said...

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.

Then the money supply is growing very, very, slowly. Dollars are an abstraction and are mainly in the form of numbers on accounting ledgers and are not any more real than a check by your own definitions.

The deposit into a bank is merely moving electrons or magnetic fields around.

But first to what might be your definition of money:

Gold is slowly being mined, as is silver, but much of that is being consumed - placed into a form where it might be useful but not recoverable, e.g. each cell phone has $0.50 worth of silver. Each car's catalytic converter has a few dozen $ of platinum, rhodium, palladium or whatever. If the recovery cost exceeds the current market exchange price it is effectively gone. That is deflationary.

All the current transactions in the economy are levered several orders of magnitude (yes 1000 to 100000) to one. This levering is credit if you mark down the bookkeeping entries down to something everyone could hold in their hands if the music stopped and there were no chairs in this game.

What the Fed is doing is thus not inflation, much less hyperinflation. It is taking part of the $54 Trillion in CREDIT and issuing a DIFFERENT CREDIT - but not money in any form that you would recognize. In your system, it is trading one check for a different check, one CD for a different CD.

There is NO money as far as I can tell anywhere in the financial system, just numbers representing quantities of Euros, Yen, Yuan, Dollars, $CDN, Pounds Sterling, but none of those have any reality. They are a virtual commodity if one at all, but if a basket of checks isn't money, neither is a basket of Federal Reserve Notes.

Even futures contracts (See MF Global) are merely claims, not actual titles of ownerships. Even the "cash" accounts themselves. You have a claim on the entity, but it can go bankrupt.

tz said...

To exchange, you have to have something to exchange. If there are no coins, then we're back to barter. If there are few coins (a form of real money by your definition) and much commodities, each coin will then buy a much larger amount of those other commodities. That is deflationary. Yes, your clad half "dollar" with some silver might fill your tank.

The ultimate subjective value of a few magnetic domains on a hard drive somewhere is zero, it is only valuable to the extent you can access and transfer that value to a different server somewhere. But again that is not money by the definition here. A check that you know will bounce is also worth ZERO. Infinite inflation, except credit isn't money. The credit in my deposit account is still credit, worth ZERO if the transaction chain or data disappears.

Credit spends like money but is NOT money. Yet everything most people call money - the investments, CDs, cheques, debit and credit cards - spend like money. But it is a daisy chain, ponzi scheme. Where A, B, and C, each write a series kited cheques to each other with nothing in the account, but the next person's kited cheque, to prevent it from bouncing. So B has a check deposited from A for $10, and has made one out to C for $10, but has zero actual dollars.

That is what is collapsing, and what is causing deflation. The "money supply" is normally the supply of both money and credit issued. That is why fractional reserve banking is a fraud. You deposit $100 (say in gold), and they can loan out $90 of that (real gold) yet still claim the debt of $90 is "an asset". But they still only have $10. Multiply this out - it is the same cheque kiting.

The Fed and the Treasury cannot create money, they can only create credit. And if credit is NOT money, then the money supply cannot be expanding, at least not in any hyperinflationary scenario.

Or another example, Greek sovereign bonds have been discounted. So the bond that was worth $100,000 euros will now only fetch $20,000. The greek bond is the virtual currency of the drachma that has been debased - it now only buys 1/5th of what it did. But it wasn't money, it was credit. But the credit is no longer worth what it was when it was taken on.

If Federal Reserve Notes are merely bills of credit - basically treasury bills or CDs, then they aren't money, so the fact they are losing value is because they are an investment or a debt of an underlying entity that is clearly heading for bankruptcy. GM and Chrysler stocks and bonds crashed too! They could buy far less when it was clear the companies could not make good on the debt.

If for some strange reason you consider a FRN as "money" instead of zero-maturity debt, you can call the effect hyperinflation. But it is still debt deflation.

Bob of Bobland said...

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?


Anonymous said...

I would argue that the money on the table in your gambling scenario is in fact still money, it just hasn't been decided who's money yet.

Noah B. said...

Nate, what's this big adventure you're about to head off to? Jealous here.

Huggums said...

Ok. Here's a question I've often wondered about. Maybe I need to review some Rothbard and Mises for this, but say we used gold metal as money. Let's say someone strikes the motherlode and finds a huge amount of gold. How does this affect the value of money currently in circulation? How would this be different than the Fed printing huge amounts of paper money off?

Noah B. said...

Huggums, I would say that the effect is the same. It's just that there is no historical precedent for the gold supply increasing at rates comparable to paper money supplies in times of high inflation caused by central bank printing.

John Williams said...

Our buddy Vox is a deflationist.
You did speak his name and now that 'he up and decided to started it this way' just tells me that you didn't have proper guilds and wards in place.

Watching Tad get kicked was getting old and his postings were less than anything the Ilk should have to bear.

This will be good in the way that iron sharpening iron is good. I'm just surprised it took so long for you two to get to this point. Maybe because no matter how much anyone argues how it may turn out, we'll have to wait to see who was right, so arguing, other than stating your position is really pointless.

Jack Amok said...

Huggums, I would say that the effect is the same. It's just that there is no historical precedent for the gold supply increasing at rates comparable to paper money supplies

Actually, depending on your definition of "comparable", the discovery of the New World and the gold and silver there did just that to Europe's economy in the 16th century, particularly Spain's.

Josh said...

It's just that there is no historical precedent for the gold supply increasing at rates comparable to paper money supplies in times of high inflation caused by central bank printing.

The only historical precedent is the conquest of the new world which doubled the supply of gold and silver iirc.

Noah B. said...

True about the discovery of the New World, and I thought to mention that, but the inflationary effects of the gold supply increase of that period still paled in comparison to what the US has experienced since the Federal Reserve was created and certainly wasn't comparable to something like the Weimar Republic's hyperinflation.

Double Minded Man said...

"No amount of debt disappearing can ever be considered deflation. If inflation and deflation are respectively the number of horses going up or coming down... then an increase in horses cannot be offset by a decrease in cows. Cows aren't relevant to the measurement."

The cows are relevant because they are in the road that those horses are traveling.

"Diamonds.. Silver... Paper... Copper... all of these things can be money... if they are employed to complete an exchange. "

This is barter, essentially. Not really all that different than how we use "money" to trade for things that we want. But these things are harder to use than "money" and so are rarely used to trade with. And worse, they have to be converted into something else before they are useful, otherwise they fall into the investment category.

I would posit that a good definition of money would be that which is commonly accepted as a form of payment in trade between 2 or more parties. At this point in history, the most commonly accepted form of payment is via plastic, whether it be debit or credit. Do you have to then convert that electronic payment into cash? Well, no. Most people don't, they just simply use their card and pass it along to someone else.

Perhaps you might then say that debit and credit are different, and I would agree. A debit card transfers "money" that you already possess. A credit card transfers "money" to a merchant and you then have an IOU with the credit card company. In this, they are different

But they are the same in a few important ways. 1.) it facilitates trade. 2.) value gets transferred as expected (long-term bias based upon our largely stable economy) 3.) Money that is an IOU will then need to be repaid and is taken out of future earnings which will not then be put into circulation via spending. 4.) Most importantly, credit "money" is chasing the same goods as non-credit "money." If I want to buy a new freezer with cash or gold I am competing against all those people also looking for a freezer but would pay with credit. This drives up the cost just as much as if all those people were paying with cash. But if those people are no longer able to pay with credit it simply won't get bought, leading to a decrease in overall demand, and a lowering of prices.

So how to answer the dichotomy of prices not rising as fast as the printing presses would seem to indicate? As VD would point out, its that credit is falling along with its demand, and taking some of that money out of circulation to pay off IOUs to various credit companies

IM2L844 said...

I just came by to listen to the music and ask why anyone would have a friggin grain silo attached to their house.

Josh said...

Dude...that's the makers distillery...

Grinder said...

Isn't fiat currency a gamble as well? Aren't you gambling that the $200 in cash you are getting for your cattle is still going to be sufficient to purchase something you feel is worth $200 when you get around to buying it? If you barter, the goods and even services you trade are a medium of exchange, no? I agree that tracking money supply is not sufficiently useful to draw inferences and base policies on

Scott said...

I think you've got the right 'money test' here, Nate -- what is accepted as money, is money. Period.

Not what could be accepted, or ought to be because I think so and it works for my theory, or used to be accepted in the past, etc, etc. What is, presently, currently, really accepted.

'Debt' in general is obviously not money. Can you take a Treasury certificate to the grocery store and pay for your groceries with it? Not could you, not ought you to be able to if the guy at the register weren't so 'ignorant,' not any other question. Can you? And the answer is no. Period. End of discussion.

I'm open to the idea that there might be 'money supplies,' such that within investment banks or whatever, those people might trade Treasuries as if they were money. But I've never been there or met those people, and I don't know how they behave, so I don't know. But as far as the general, broad market is concerned, they are not money.


Josh said...

'Debt' in general is obviously not money. Can you take a Treasury certificate to the grocery store and pay for your groceries with it? Not could you, not ought you to be able to if the guy at the register weren't so 'ignorant,' not any other question. Can you? And the answer is no. Period. End of discussion.

Can you take a credit card to the grocery store and buy groceries with it?

Cool Hand said...

Nate: good post. 1 question
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?

Still adds debt, that has to be repaid, and I still end up with the asset; provided I can cash flow it.

David of One said...


Let's use your example of horses.

I see two basic issues salient to the discussion:

1. The price or value of your horses.

2. The currency or money acceptable to you to buy and/or sell horses.

Let's also say that you are an extremely wealthy man because you have more than 10,000 horses AND you live in an area of the state that no one has horse except you and everyone wants one of your horses.

Damn, your rich because no one, but no one has horses for 500 miles around you and everyone wants one. They gots to have one!

So you have a pretty dang good business going! Demand for your horses is beyond the moon!

But wait a darn dagnabbit second!

Only now you are finding out that there are ALIENS floating above the planet from the federation of banksters called The FED.

These Feds are dastardly no good lowdown snakes belly to the ground and unbeknownest to you these damned galoots put 1 million horses in your back 50,000 acres.

At first your are elated and you are dancing around for your good fortune! You are dancing around bowed legs and all ... stirrups dingling bells a tingling (people assume you ride horses a lot and that's the reason for your bowed legs but in reality your Misses rides you like a Bronc that's been broke a long, long time ago. But what the heck! You have a smile on your face, 22 children and you just mosey kinda slow during the day and git rid hard at night!)... until reality sets in ...

continued ...

David of One said...

to Nate continued ...

Wait a danged minute! Just how the heck are you going to feed and water and care for those 1,010,000 horses? And .. and what about all that manure? Dang your stirrups aren't even jingling anymore for all the horse manure all over! Your realize quickly pretty soon you’re going to have horse manure past the top of your chaps!

Son of a gun!

Then there is something more hideous and more insidious than you ever dreamnt of ... ever! There are strange folk from SAN FRANciscOOOO and Newwww YOORRK making noise about them horses not being taken care of properly ... water, food, manure removal and free medical care. These folk are weird, they dress queerly and the men and even the women looking critters walk around talking “Gaia” , rubbing up & down each other unseemingly and are breaking into your property hugging the horses and demanding "ProfoLactics" for the horses! Free "ProfoLactics"! Even stranger they wouldn’t even fit a horse!

Business is good though! You’re selling 2,500 horses a day but you aint making a dint into the manure and the strange folk running about the property are going to the Sheriff complaining about you! Hell they are outsiders!

Worse yet the sales are slowing down! So you quickly start selling horses 2 for the price of 1 ... then 3 for the price of 1 and then shortly 8 for the price of 1. But problems are growing with your sales.

But there's still a problem the horse manure is still gettin deeper and smells bad ... or is that the strange folk from California and New York. Heck you can't tell if the smell is the horses or the strange folk.

Suddenly, those dastardly Feds do something amazing ... Poof! As suddenly as those horses appeared they disappeared! Hallelujah!

Again, you are dancing around and so thankful that your over bounty of good luck is done! Except that those strange folk are wandering around and it looks like this might be a problem.

But wait a sec! You realize you have a humongous wad of money AND you still have your 10,000 horses! Yahoo! And folk still want to buy your horses! Wow! More bowlegged dancing ensues!

But suddenly those dastardly Feds do something PROFOUND! Everyone and you wake up to find that those Feds gave everyone and you as well, $1 Billion dollars each!

The next morning a feller shows up and offers you $10,000 for each of your horses and wants 100 of your best horses! But the next morning two folk show up and start outbidding each other and pay $20,000 for 1,000 horses each. A couple of weeks go by and you haven't sold one horse.

Why is that?

Is it the value of your horses?
Are there too many horses in the area you live in for 500 miles around?
Other folk are now able to buy and sell horses?

You scratch your head and your arse a go to the local store. To your surprise, the store owner Fred jacked all the prices up! Bread is now $250 a loaf! What the heck is going on now?

You wonder about this and notice out the window those strange folk are painted up and convorting around with each other down the main street! What the heck is that about?

So what is this all about?

Back to your almost nill horse sales ...

Is it the price of the horses?

Is it the value of the money?

I don't know! I'm just asking.

Is it product, value of the product, demand for the product, the currency, Fred or even the strange folk parading down main street?
Has the price of your horses deflated?
Is the price of the bread inflated?
Is the value of the money deflated?
Do you have too many horses?
Is there too much money?
Regarding the price and availability of bread … is it because all the bakers in town, except one, went to Las Vegas? Is it because those Feds now have all the yeast?

Scott said...

Can you take a credit card to the grocery store and buy groceries with it?

No, you can't, as Nate rightly pointed out. 1)When you walk out of the grocery store, you still have your credit card, so obviously the card itself was not used to pay 2) since it obviously wasn't the card, what was it? Credit extended by a bank in the form of bank deposits.

Suggestion -- cut out the 'mental shortcuts.' Abstractions are not reality; just because you can think about something in a certain simplified way and get the right answer most of the time to particular questions, doesn't mean that the way you think about the something is the something itself. Money is a really freaking hard subject. Oversimplifying things is going to screw you up.

Of course, Nate can't use his house to pay for things either, so I disagree with that part. But the 'moneyness test' is quite right, in my opinion.

SarahsDaughter said...

"While the little ball is dancing on the wheel... deciding where it will land... how much money do you have?"

Schrödinger's money.

JACIII said...

Pardon me while I enjoy my brother getting to spar with the Ilkish brainpower combined in near totality; snark, sarcasm, pedantry in evidence and all in maximum overdrive.

Sometimes life is certainly glorious.

Incidentally, Y'all are wasting your time: Josh is a member in good standing of the Jew Banker Overlord Cabal (JBOC - pronounced, "JAY-bok" by those in the know) and we can just ask him whether they will be implementing hyperinflation or deflation.

JaimeInTexas said...

Mansa Musa
" When Mansa Musa passed through Cairo, legends say he gave away so much gold that the price of it fell and the economy was affected for more than twenty years."

Nate said...

new post is up. Answered as many as possible.

Nate said...

I can't pay for anything with my house's equity... until I convert that equity to money through sale or loan.

And once I spend it...

THEN.. and only then... is it money. and then and only then should it be counted in the money supply.

cherub's revenge said...

Just letting you know I read, since I mentioned it the other day and you took the time to write it.

I'll reserve comment until Vox's response and I hit the Mises website to digest a bit.

Kentucky Packrat said...

I forgot one comment:

There is NO WAY you should have posted the version of Land of Confusion over Genesis' video by Spitting Image. Unlike some other songs, no one has yet topped the original Genesis recording.

Scott said...

Nate --

Yes. But it was the money that was the money, not the house (or equity in the house...). The house was a good/asset/whatever you want to call it, which you either partially or fully owned (depending on how much equity you had). It was only a sort-of innocent bystander.

Its value fluctuated with the market (subjective valuation, all of that) but these movements have no direct influence on the supply of money, in and of themselves. Money was given to you for the house, and you spent the money as money, but the supply of money did not change through the transaction. It just moved from one set of hands (or bank account) to another.

patrick kelly said...

sum1 said "if you filled one of the cars with tannerite and blew it to kingdom come"

It would be a lot more fun than inflation or deflation.

Nate said...

That is correct if I have the cash in my account and buy the house with it.

However.. if the Fed creates the FDN... then gives it to the Bank... who then gives it to me... and THEN i spend it...

That is inflationary... and that is the most common practice.

Supernaut said...

In the context of discussing Inflation versus Deflation, getting hung up on the definition of what is and is not money is a waste of time.

That's because all "money" in our current system, is ALL DEBT.

Every stinking, filthy dollar we use, was printed by the Federal Reserve, who than charges we the people interest on this grand service of fiat dollar creation.

And that's just what's actually printed.

Let us not forget all this "money" that gets created by every single Banking branch across the country. All Cartel members with the ability to "create" "leger" money with a few key strokes...voila, a bank account is set up in a person's name with a so-called arbitrary amount of "cash" created when the loan papers are signed. This person then turns around uses all that freshly created "debt" as if it were money.

In the macro-economic perspective, it's a waste of time trying to differentiate debt from cash, since all cash is debt derived in the first place.

Nate said...

What is printed on the dollar bills means nothing
... and neither does the system they purposes to creat them.

Mina said...

Good debate, I generally agree with you. I still however prefer Chris Martenson's defintions from the Crash Course - very simple and to the point.

In any case, I wanted to thank you for pointing me to the AR15M4 - I have finally ordered one (Colt, it was all I could find!) and plan to trick it out a bit if I can figure out what specifications are important in order to match things up ...

I had no idea until last night the big "thing" with the AR15 (see Wired : The AR-15 Is more than a Gun, it's a Gadget) Having been a long time PC builder, tweaker, geek (since probably 1989...) this "maker gun" concept is very appealing!

I read the article to my husband last night and all he could say was "uh, oh" :-)

Thanks again. Sorry I am a bit off topic. Didn't know how else to reach you.


Mina said...

Forgot the link to the article:
Wired AR-15 Is more than a Gun, It's a Gadget

Nate said...


Guns are NEVER off topic.

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