Money is not finite

[melalvai]

This isn't a book but a Coursera course, History of Humankind https://class.coursera.org/humankind-001/class. The instructor was inspired by the book "Guns, Germs, & Steel" by Jared Diamond.

The instructor presented a concept that I've been chewing on for a while: that money is not finite.

Think about it. The world's economy in the middle ages was a fraction of what it is today. Orders of magnitude different. Where did all the additional money come from? Where does any money come from? Well, money is ENTIRELY IMAGINARY. It only exists because we all agree to believe that it exists. These days, it doesn't even exist as worthless paper--most of it is worthless electrons.

This has a lot of implications. Such as, why are we so mad at the 1%? Everyone says they have so much wealth that there's not enough left to go around for the rest of us. But money isn't finite. We could redistribute the wealth. Or we can create/ invent more. That is, we could all just agree that more exists. It might be easier to redistribute wealth than to get everyone to agree that more exists, but my point is, here's another option.

I'm not talking about inflation. I'm talking about the difference between the middle ages and today's world.

I don't know how to make anything like that happen. I'd love to hear your thoughts. How do we create more money-- agree that more money exists-- vs inflation? Because those are 2 very different things.

[aglassman]

During an interview at a huge financial transaction company (they process a huge % of the world's credit card transactions), I got a tour of the data center.  One of the higher ups even said to us something like "This is were X% of the worlds money goes in and out of every day, that is if you believe money exists, but that is a different debate." 

We could just agree to create / invent more money.  And we do (In the US).  The Federal Reserve is has been doing this for a long time.  The Federal Reserve buys  bonds, which puts more money into circulation, or sells bonds, which takes money out of circulation. 

I like to think of currency reflected as "human effort / hours"  You paid someone $7.50 an hour to do a job for you.  By just printing more money, you have effectively devalued that persons effort, aka inflation.  This is why printing more money causes inflation.  The effort expended to "print money" was way less than say mining for gold, or working at any job.  At least that is how I understand it.

[melalvai]

Right, so how do we create more actual wealth? Not inflation, but wealth?

[Flying Squirrel]

The concept of fiat currency is very interesting. It makes a lot more sense when you do some serious studying on the subject. I wouldn't say that money is entirely imaginary because the only way it works is that we give it value.

I took a Money and Banking course a long time ago, but US Dollars ARE finite. They are allowed to grow at a very specific rate designated by the Federal Reserve. Banks are loaned the money created by the Federal Reserve, at an interest rate. Then those banks, loan the money to more banks. This is called the Fractional Reserve banking system. Banks only need to have a percentage of their deposits on hand, because they loan out the rest of the money. If everyone went to the bank today and wanted to withdraw their funds, the system wouldn't work.

I find the concept that money is created and then loaned at an interest rate to be fascinating. Imagine you create a currency and only make $100. Then you loan that currency out to someone at 5% interest. But total money is only $100, and the person repaying the loan now owes $105 after the first year. How do you pay back the $5 that doesn't exist?

http://en.wikipedia.org/wiki/Money_supply

http://en.wikipedia.org/wiki/Fractional_reserve

http://en.wikipedia.org/wiki/Fiat_currency

[Cecil]

Money is a proxy for labor. The sum total of the money flowing through the economy each year represents the value of all the work that everyone did: All the food grown, all the products made, all the new inventions created.

If you double the amount of money by printing more without changing the amount of value created, you simply just double the "exchange rate" between money and human labor. That's inflation.

Saying there's more money now than in the middle ages doesn't really mean anything. There could be any amount of money without really changing anything other than the "exchange rate". We could say tomorrow that $100 now equals one "new dollar", and the average salary is $500, and a Big Mac costs $0.03. Have we changed anything? Zimbabwe did this several times in 2009. as they went through insane hyperinflation.

Creating a bunch more money doesn't change the fact that the average worker can only afford to buy 16,666 Big Macs per year.

What *has* changed since the middle ages is technology. By taking advantage of the multiplying effects of technology, one person is able to create orders of magnitude more value than they could in 800AD. The cotton gin for example made workers 25x more efficient. Suddenly the world can produce 25x as much cotton with the same amount of effort. Or, we can make the same amount of cotton and free up most of the workers to produce other things of value.

[AlanStache]

Well money is an intermediary unit that is convenient for exchange (and assuming here that not-finite = infinite) then as information/knowledge and stuff is infinite so might be money.  Right now I would lean towards disagreeing with your prof
information/knowledge/stuff are finite eve on a cosmic scale. 

Also there are numbers so large that they can not be written down using all the atoms in existence so you could not specify such an amount of money, would that make it infinite?  Am an engineer not a philosopher.

The creation of more money, ie increasing the supply, is what gold bugs and hard currency types define as inflation.

Or is your prof just extrapolating, 1000 years ago we had X money, 500years ago we had X^n money now we have X^m money therefor in 1000 years we will have more money than can be specified?

Read GGS years ago, really liked it.

The amount of money really does not matter, we could normalize it and have a perfectly fine economy where a new home cost 0.00000000001 dollars.  Is just an intermediary unit that some special groups (The Fed) get to wave a wand and make more of but everyone else does not.  I would guess that even after normalization it would continue to grow.  (Banks with the fractional reserve system do something similar...).

Being mad at the 1% has nothing to do with the volume of money in existence; it has everything to do with its distribution and the rules for acquiring a larger personal share of that distribution.

In "a connecticut yankee in king arthur's court" there is a bit about how in one area a man is paid less per day of labor but that less money gets him more goods because of the industrial efficiency in that area.  Some of the people from the 'higher' paid area think they are doing better because they get 100$ per day rather than 80$/day and they cant appreciate that that higher number gets them less stuff.  good read, Twain knew his stuff.

I once subscribed to the "human effort / hours" sense of money but it brakes down when more money is created by the Fed or other banks, after this creation labor or stuff was not generated.

I guess in the end I would look at the profs original thought of "infinite money" as sort of "ok-maybe, I will give you that it can be arbitrarily large, but what does that get you?"  and just because something can/has always grown does not make it infinite unless time is also infinite, then maybe...  or at least until human and our soon to come Robotic Over Lords go extinct.

all right time to go back to lunch.

[Cecil]

I find the concept that money is created and then loaned at an interest rate to be fascinating. Imagine you create a currency and only make $100. Then you loan that currency out to someone at 5% interest. But total money is only $100, and the person repaying the loan now owes $105 after the first year. How do you pay back the $5 that doesn't exist?

Money is a proxy for human labor. You pay back the $5 by doing $5 worth of work for the person who lent you the money.

Suppose you're stranded on a desert island, and you pick berries at the rate of 100 per day, which is exactly what you need in order to survive. You have an idea for a berry picking tool that will take a day to make and would double your productivity, but you can't afford the time to make it without starving.

If you could borrow 100 berries from another castaway, then you could spend a day making it, and repay your loan with 105 berries over the next few days.

How did you "create" those 5 berries?

[Cecil]

I once subscribed to the "human effort / hours" sense of money but it brakes down when more money is created by the Fed or other banks, after this creation labor or stuff was not generated.

The way to fix this line of thinking is to consider that there is an "exchange rate" between human effort and $. When the Fed makes more money, it's just altering that exchange rate.

[aglassman]

Well, people do create new wealth every day.  They start a business.  The business creates jobs, the jobs pay money.  The government can try to stimulate this by giving out cheap loans or free money, or favoring industries, which they do.   Government can also help via education and job training programs, which they do as well.  What can you do to help keep the rich from getting richer?  Buy local, stay debt free, barter, use craigslist.  This helps keep money in the hands of the community, rather than the hands of 1%ers who have setup elaborate systems to funnel money away from communities via franchises, credit cards, and banks.

[AlanStache]

"The way to fix this line of thinking is to consider that there is an "exchange rate" between human effort and $. When the Fed makes more money, it's just altering that exchange rate."

Yes I agree in the exchange rate thing, I am taking part in that system right now.  Yes I agree that the Fed alters that exchange rate but that process is not instant.  For a time after creation we have more dollars but not yet an adjusted exchange rate, wadges and (non-stock) prices dont change on millisecond ticks cycles. 

Have not really read on the theory of money in to many years will have to go reread on the topic.

I just get nervous when someone makes (really) any absolute statement or says something is infinite.

[AlanStache]

aglassman: most everyone on this forum does what the 1% do to some extent, we all loves us some dividends and capital appreciation.  The difference is in magnitude and specifics not concept.  Player-hating?  not to defend anything or any one specifically. 

But if I could make 100% annual return I would, and I bet everyone else here would too (Ok depending on there net worth and relative amount of labor involved but you get the idea).

[aglassman]

Yeah, I have no issue with any of that.  I use a bank, and credit cards, and go to franchises. I was just trying to come up with a way to create more wealth, and re-distribute wealth without creating inflation.

[Hadilly]

Neal Stephenson's Baroque Cycle has some very fun money related parts (Isaac Newton and currency!) also bits about building a modern economy, beginning of scientific thinking... Strong recommendation for anyone who enjoys challenging and seriously thought-provoking fiction. Plus Stephenson is seriously smart and a good writer to boot.

[grantmeaname]

I was just trying to come up with a way to create more wealth, and re-distribute wealth without creating inflation.

Increase the productivity of enterprises. Easier said than done, and certainly harder than a handwave.

Neal Stephenson's Baroque Cycle has some very fun money related parts (Isaac Newton and currency!) also bits about building a modern economy, beginning of scientific thinking...

When does this start? I've read what seems like a million pages and I'm a quarter of the way through the first book! The reasons you list are why I picked up the series but so far it's all about alchemy and character development.

[AlanStache]

grantmeaname: stick with the Baroque cycle!!  Is awesome work, but for enjoyment I would recommend reading cryptonomicon first if you have not already.  sorry cant remember where the currency stuff starts but it has to be in there somewhere over the 4000 pages.

[deltaecho]

book 2 of the series gets a little more juicy.  I had a hard time getting through the first book.

[swick]

Bumping this topic because it was the closest I could find.

I have been reading "Sacred Economics" By Charles Eisenstein which I stumbled across because I read about a web design company who uses "gift economy" as payment. It touches on many of the ideas here and presents some interesting challenges/possibilities for those seeking FI and ER.

Text is here: http://sacred-economics.com/wp-content/uploads/2012/01/sacred-economics-book-text.pdf

Anyone interested in making a book club thread out of it or want to discuss some of the things brought up?

[avonlea]

I just visited amazon to see a summary and some reviews. I am interested in reading Sacred Economics.  Thanks for posting a copy, swick!

If a book club thread gets started for this, I will join in once I have gotten far enough along in the book.