Economics 101: The Money Problem

cryosun wrote:

ravenpaige wrote:I found this LETS (actually, not a LETS since it's international):

http://www.community-exchange.org/

I was thinking about encouraging my local Occupy and other Occupys to join. Local exchange can be used for the local community, but exchanges can also take place between the exchanges.

Should all or many of the world-wide Occupys join, this could broadly increase the number and type of offers, which in turn might help to eliminate the problem of not enough offers to get the velocity of exchange high enough to warrant additional offers, especially in the form of goods that might require real dollars for the purchase (or the purchase of supplies to create).

Thoughts?

*Cryosun does Snoopy's happy dance!*

I was pretty frustrated before the Occupy movement spontaneously materialized on the streets of the world. I kept getting shut down by apathy and impenetrable ignorance everywhere I tried to talk about it. Ok, so "everywhere" constitutes my place of employment where I work as a welder- go figure. I intended first to make a presentation to my employer as to how they can start managing credit for other companies up and down their supply chain in order to stay profitable. But before I can do that, I figured I needed to get some experience talking about these things in a way that doesn't annoy people. If I can do that, its fine if my employer blows off the idea. Maybe the city will listen, and if not them, then it's possible to start a small network that can grow into a network of networks. I knew next to nothing about Anonymous. I'd heard of some hackers who don't like Scientology, but who cares... and now suddenly #Occupy is everywhere and there's a means of communicating to precisely those people who care about these things. I'm totally freaking out! Freedom went from virtually impossible to something that might just spontaneously crystallize worldwide out of the results of the #Occupy movement. The banks just might wake up one day soon to discover they are trying to sell buggy whips to a population with no use for them.

Barring disruption of the internet, anonymous has the power to pull it off. But we have to first understand the basics of credit accounting. They are pretty simple. (Unlike our oppressive system that is inordinately complex.) And we have to look at all the LETS and other local currencies that have failed and learn from their flaws. If this were an active discussion among Anons, it would go a long way to distilling out the most effective approaches and put them into motion before getting a whole lot of people excited about something that has some flaw hidden in details of the practical application. If people go in understanding what they do is experimental, they will not feel burned by the learning curve they have to go through to get it right. If they go in thinking they are free at last, I believe the learning curve will disillusion folks before they have a chance to work out the bugs. There is so much tribal energy in the occupy protests- the drums, the bonding, the gift economy alive from all the contributions of those who put together the kitchens, sanitation solutions, literature, signs, web hosting, this forum, etc, etc.- if occupy can get a viable currency to work (or better yet, a network of competing currencies each with their own local tweaks competing in a grand race to find the most viable schemes- then it's not impossible for us to get free of the interest-bearing deceptocracy.

My next post will be about Quantity Theory of money and inflation, as I promised earlier. My objective with that post is to clear up the concept of money as a commodity that is produced and sold on the open market. Money conceptualized as a commodity is what keeps the gold bugs (like Ron Paul) stuck. As you go through this thread, it's easy to see that the gold bugs keep popping up and don't like to let go of their commodity concept of money. I will do my absolute very best to try to keep this flawed concept from thwarting the #occupy movement's ability to successfully create a viable alternative to the banks.

cryosun wrote:When most people think of money they think of the most tangible form of money- cash. As small children we generally encounter cash before any other form- small change earned for small tasks around the house. Tooth Fairy money. And cash looks to our young eyes to be permanent. You can store it away in a box for several months and take it out and it still spends just fine. The gold bugs think about gold in the same way. It's permanent. And why shouldn't cash be just as permanent- a perfect mirror of gold, just lighter to transport and more convenient to exchange?

I read somewhere (sorry, it was a long time ago in some history magazine I can't remember the name of) that in ancient Mesopotamia there were multiple commodities that were traded as exchange media. The exchange media commodities were traded via a representational form of currency- clay tokens with symbols representing those commodities: barley, flax, silver, goats, and a couple of others that were commonly exchanged. When flax had a good crop and people were swimming in flax fiber, the relative exchange value of flax dropped compared with every other exchange commodity. When the barley crop failed and barley became scarce, people were extra keen to make sure they got the barely they needed and would pay higher prices in terms other commodities to get their barley. The more abundant a commodity, the less desperate people are to get it and the less they will pay for it in terms of other commodities. The less abundant a a commodity is, the more people will trade for it in terms of other commodities. Even labor- when the union wants to increase the sale price of their labor to employers, they go on strike. That is to say, they make labor scarce to make their employer more desperate and therefore willing to pay a higher price to get it. This law of supply and demand applies to everything for sale in the market. So far this is kind of a no-brainer.

Nonetheless, some three-plus thousand years after the ancient Mesopotamians the Spanish were still surprised when relative abundance of gold hauled in by the Conquistadors made the price of gold drop relative to everything else- they apparently thought gold was money with some kind of mystical value attached to it- that belief instilled by lifetimes of experience with scarce gold. Today the Federal Reserve claims in its publication Modern Money Mechanics on page 3 (in the .pdf listed) that scarcity is what gives money its value.

"Money, like anything else, derives its value from its scarcity in relation to its usefulness. Commodities or services are more or less valuable because there are more or less of them relative to the amounts people want... Control of the quantity of money is essential if its value is to be kept stable."

http://www.archive.org/details/ModernMoneyMechanics

The Fed claims that they as the guardians of our money they intend to keep it scarce for our own good. So they are slightly smarter than the Renaissance period Spanish but not by much. Relative scarcity has something to do with relative price when it comes to commodities and the Fed has figured that out. They treat money as if it were a commodity, fluctuating in value relative to all other commodities traded in the market. It is their stated objective to manage inflation- meaning to manage the market price of money- by managing its quantity supplied by managing its demand via the interest rate.

I believe they would attempt to limit our supply of air to keep its value high if they could. For our own good and stability, of course. Of course thinking of air in terms of market price has been absurd up until this new cap-and-trade scheme was devised, turning air into a financial derivative to fuel a new speculative bubble... but I digress, sorry. Back on track: Air is valuable! Air is valuable for the purpose of sustaining life. That's what it is valuable for. It doesn't become more valuable as it becomes scarcer- its value as a life sustaining commodity remains unaffected by quantity. That is to say, it does not gain a greater capacity to sustain life, and become therefore more valuable, as it becomes more scarce. And grain does not become more valuable as a food as it becomes scarcer. The thing that changes in both cases is not value per se, but desperation as measured by the money people might have to spend to get what they need. By confusing desperation with value, the Fed has us completely bamboozled. We now have well-intentioned Tea Partiers begging for the imposition of draconian desperation-creating austerity measures upon themselves in the belief that that will keep the money and the system it represents valuable!!

The weird thing about quantity inflation of the money supply is that even though the numbers show there is more of it around, there still somehow isn't enough of it for most people for to get themselves free of debt and to get the things they need! The numbers of circulating money units are bigger, but the spending power in circulation is no bigger. It's not the change in quantity of money that is the problem behind so-called quantity inflation, it is the change in the money's usefulness as an exchange medium that causes quantity inflation. Here again we see a figure of economic terminology that is misleading and making it harder for people to recognize the problem of inflation for what it is. All quantity inflation is caused by new money being brought into circulation that was not issued in a way useful to the creation of wealth. In the previous post, we mentioned military and repressive police spending do not bring new goods to market. Military spending taxes wealth out of the system and replaces that wealth with non-productive money. The dole does much the same thing. Money issued for the purpose of production goes into circulation and enables the trading of that production at the same time. That is the only useful money. The more useful money is, the greater its value as a medium of exchange. The more money is abused by mal-issue and mis-allocation of wealth into non-productive activity, the less access to it actual producers have, and the more of it there is in relationship to quantity of things to buy with it. It becomes more “inflated”- the properly issued money cannot be distinguished from the non-productive issue. It takes more of any money to represent the same amount of value in the market. The faith in the money's ability to accurately represent a unit of value is shaken when it is issued in a way that does not create value.

Ok, to review our distinction between price inflation and quantity inflation. Price inflation is caused by everyone's expenses of doing economic activity increasing. Quantity inflation is caused not by just any new money being brought into circulation but by new money being brought into circulation by some kind of non-productive mal-issue that throws off the balance between things to exchange and money to exchange things with.



A would-be money issuer must, in exchange for the goods or services he buys from the market, place goods or services on the market. In this simple rule of equity lies the essence of money.
- E. C. Riegel
http://www.newapproachtofreedom.info/ffi/chapter02.html
In this chapter Riegel beautifully describes the LETSystem that was re-invented some 40 years later by Michael Linton in Canada. Just use a search quoting the above text from the chapter to find his elegant description of a kind of ideal money that is issued properly.