Economics: Why are mainstream views different from reality?

[Sakal Gharelu Ustad]

I have become a fan of your partial analysis. If you dig gold and then print money, how does that make a difference??

The above analysis applies to your system as well.

And I know the next argument that you are going to put now, but I will wait for it before writing the rebuttal.

P.S. I have no interest in abortion talk now. But Ron Paul's abortion debates bring a smile on my face.

 

[pmaitra]

I have become a fan of your partial analysis. If you dig gold and then print money, how does that make a difference??

The above analysis applies to your system as well.

And I know the next argument that you are going to put now, but I will wait for it before writing the rebuttal.

You still did not counter my point, did you? Do you agree that the current system will eventually collapse? If you agree, say "I agree." Otherwise, I will wait for you to counter it.

P.S. I have no interest in abortion talk now. But Ron Paul's abortion debates bring a smile on my face.

It has got nothing to do with your interest. Abortion is off topic. Open a new thread if you must talk about it. Don't talk about it here.

 

[Sakal Gharelu Ustad]

Well, I would try to be as crisp as possible.

Printing the money also implies, people will have more money in their wallets(and I am not talking of hyper-inflation here). So, if there is a growth in wages say by 1% the real earnings would be stable. No one cares about nominal variables and your above analysis is completely nominal. Learn to differentiate between nominal and real variables and when to invoke the concept of "ceteris paribus".

Now coming back to inflation, there is no perfect measurement of inflation. New services and products are added everyday and they do not get reflected in any of the inflation indices. But productivity has been rising all through this time and one cannot attach the printing of money to something as random as gold dug out in an year. So, even though current printing of money say 4% p.a. might look like being created out of thin air due to use of existing inflation indices, it actually reflects productivity increase in the economy. And I do not stick to the 4% figure just because I quoted it above, it can be revised over time depending on the situations. Hope that helps.

This is how the standard of living has goes up by printing of money whether backed by gold or not else we could not have avoided the deflationary trap.

 

[pmaitra]

Printing the money also implies, people will have more money in their wallets(and I am not talking of hyper-inflation here).

Nope. People will have the same money, just more pieces of paper.

So, if there is a growth in wages say by 1% the real earnings would be stable.

Sure, let's take your 1% annual wage growth. So in year k, one earns Rs. x and in year k+1, he earns Rs. 1.01x.

Now, in year k, he paid a rent of Rs. y and bought rice for Rs. z/kg and in year k+1, he paid a rent of Rs. 1.01y and bought rice for Rs. 1.01z/kg.

Now this will give you a good example of what 'real' money is.

I don't see him earning more money now. Do you?

No one cares about nominal variables and your above analysis is completely nominal. Learn to differentiate between nominal and real variables and when to invoke the concept of "ceteris paribus".

Some people do, but perhaps you can help me with a nice example, because I doubt I got it perfectly fine.

What is nominal and real variable?

Now coming back to inflation, there is no perfect measurement of inflation. New services and products are added everyday and they do not get reflected in any of the inflation indices. But productivity has been rising all through this time and one cannot attach the printing of money to something as random as gold dug out in an year. So, even though current printing of money say 4% p.a. might look like being created out of thin air due to use of existing inflation indices, it actually reflects productivity increase in the economy. And I do not stick to the 4% figure just because I quoted it above, it can be revised over time depending on the situations. Hope that helps.

What? Printing more money out of thin air reflects productivity? How?

If say DFI Island has 100 tonnes of Gold. Now, she wants to purchase a ship. She will probably pay some of her DFI$, where each DFI$ equals a portion of the total 100 tonnes of Gold. Now, she keeps buying and runs out of money. She decides to print more DFI$. So what happened now? The value of each DFI$ fall, and those who still have DFI$ in thier possession got pawned. Think of what Germany did post WWI. Eventually, people will lose faith in DFI$, and simply tell them, "Pay me in gold bud. Your money ain't worth the paper it is printed on dawg!"

Anyway, not let us assume, DFI island had 100 tonnes of gold, and suddenly discovers a lot of gold, mines them, and adds them to the treasury, without printing any more DFI$. What happens now? The value of each DFI$ increases.

Now I just used gold as a tangible collateral. Most people tend to use it as a collateral. Even the German word Geld, for money, comes from gold.

You can use anything else that is tangible for your calculations. Feel free to use Uranium if you like, or land, or your satellites in space, or milk and butter, as long as it is tangible. India, for example, uses food as one of the indicators when computing inflation. (I just gave some examples, not necessarily proposing them as good standards for currency)

This is how the standard of living has goes up by printing of money whether backed by gold or not else we could not have avoided the deflationary trap.

Standard of living has been increasing ever since man learnt how to kindle fire. Standard of living was increasing even when the US had a Gold Standard. This is just baseless argument.

 

[asianobserve]

You still did not counter my point, did you? Do you agree that the current system will eventually collapse? If you agree, say "I agree." Otherwise, I will wait for you to counter it.

This is a simplistic view harbored by socialists about the current financial system. I'd like to wait for the time when the current system will collapse. Even the Indian government and the rest of BRICS does not seem to agree with this outlook as they are pushing for an alternative currency to the dollar (otherwise they would push for the gold as a standard).

 

[pmaitra]

This is a simplistic view harbored by socialists about the current financial system. I'd like to wait for the time when the current system will collapse. Even the Indian government and the rest of BRICS does not seem to agree with this outlook as they are pushing for an alternative currency to the dollar (otherwise they would push for the gold as a standard).

May God protect you from a situation like that below:

Super inflated currency from Zimbabwe. You wanna go grocery shopping, you better have an SUV. Your car will be lighter on your way back home.

 

[asianobserve]

But the more curious aspect of the gold standard is that it unfairly favors countries with huge natural gold deposits... How about countries with no significant natural gold deposits, then they have to buy gold from a gold producing country? So African countries with huge gold deposits can just sit back (and be lazy) as they are automatically zillionaires... Wow...

Moreover, don't think that gold is not subject to speculation. Even now a lot of economists think that the inflated gold price is largely due to speculation.

 

[asianobserve]

May God protect you from a situation like that below:

Super inflated currency from Zimbabwe. You wanna go grocery shopping, you better have an SUV. Your car will be lighter on your way back home.

You're making Zimbabwe the poster child of the current monetary policy? Their misery is a product of Mugabe's Socialist policies... :shocked:

 

[pmaitra]

But the more curious aspect of the gold standard is that it unfairly favors countries with huge natural gold deposits... How about countries with no significant natural gold deposits, then they have to buy gold from a gold producing country? So African countries with huge gold deposits can just sit back (and be lazy) as are automatically zillionaires... Wow...

Moreover, don't think that gold is not subject to speculation. Even now a lot of economists think that the inflated gold price is largely due to speculation.

Read post #81. I did not say you must have gold and only gold and nothing else. Read that post again, completely.

And yes, you have a point. One country suddenly discovering a lot of gold will suddenly become very rich, and that is how it is. When oil was suddenly found in the Middle East they suddenly became rich. When gems and precious stones were found in Yakutia, the Russian Federation suddenly started mining them, exporting them, and yes, they would be much less richer, if they did not have gems and precious stones in Yakutia. Similarly, if you buy an old dilapidated house, and start repairing it, and then in the ruins, you find a lot of gold, you become very rich.

Sure, gold won't feed a hungry stomach, so when you are hungry, you give some of the gold to another farmer, who in turn will give you a few bushels. He will keep that gold for a later period. This is how everything started, and gold, silver, etc., became units of currency.

Now, in the time of famine, the value of food might be more than otherwise. So yes, no one can guarantee the stability of gold. But then, it still isn't as bad as printing money out of nothing.

Please explain that.

Regarding speculation on gold, yes, you are probably correct.

 

[pmaitra]

You're making Zimbabwe the poster child of the current monetary policy? Their misery is a product of Mugabe's Socialist policies... :shocked:

Zimbabwe did print a whole lot of paper currency notes when they did not have enough reserves to back up that currency. Do you or do you not agree with that?

This has got nothing to do with Socialism. This is not the case in Vietnam, nor in PRC. This is all about printing money out of thin air.

 

[asianobserve]

And yes, you have a point. One country suddenly discovering a lot of gold will suddenly become very rich, and that is how it is. When oil was suddenly found in the Middle East they suddenly became rich. When gems and precious stones were found in Yakutia, the Russian Federation suddenly started mining them, exporting them, and yes, they would be much less richer, if they did not have gems and precious stones in Yakutia. Similarly, if you buy an old dilapidated house, and start repairing it, and then in the ruins, you find a lot of gold, you become very rich.

Oil is only valuable because it is an essential industrial ingredient, and industries give us all that we need and want. What does gold do? It's practically just a lump of metal with not much industrial value. The value of gold is purely speculative... it only exist in the minds of speculators (like how monetary values exist in the minds of central bankers...)?

 

[Sakal Gharelu Ustad]

Nope. People will have the same money, just more pieces of paper.


Sure, let's take your 1% annual wage growth. So in year k, one earns Rs. x and in year k+1, he earns Rs. 1.1x.

Now, in year k, he paid a rent of Rs. y and bought rice for Rs. z/kg and in year k+1, he paid a rent of Rs. 1.1y and bought rice for Rs. 1.1z/kg.

Now this will give you a good example of what 'real' money is.

I don't see him earning more money now. Do you?


Some people do, but perhaps you can help me with a nice example, because I doubt I got it perfectly fine.

What is nominal and real variable?


What? Printing more money out of thin air reflects productivity? How?

If say DFI Island has 100 tonnes of Gold. Now, she wants to purchase a ship. She will probably pay some of her DFI$, where each DFI$ equals a portion of the total 100 tonnes of Gold. Now, she keeps buying and runs out of money. She decides to print more DFI$. So what happened now? The value of each DFI$ fall, and those who still have DFI$ in thier possession got pawned. Think of what Germany did post WWI. Eventually, people will lose faith in DFI$, and simply tell them, "Pay me in gold bud. Your money ain't worth the paper it is printed on dawg!"

Anyway, not let us assume, DFI island had 100 tonnes of gold, and suddenly discovers a lot of gold, mines them, and adds them to the treasury, without printing any more DFI$. What happens now? The value of each DFI$ increases.

Now I just used gold as a tangible collateral. Most people tend to use it as a collateral. Even the German word Geld, for money, comes from gold.

You can use anything else that is tangible for your calculations. Feel free to use Uranium if you like, or land, or your satellites in space, or milk and butter, as long as it is tangible. India, for example, uses food as one of the indicators when computing inflation. (I just gave some examples, not proposing them as good standards for currency)


Standard of living has been increasing ever since man learnt how to kindle fire. Standard of living was increasing even when the US had a Gold Standard. This is just baseless argument.

Dude, you are blinded by the entire current system and it has clouded your arguments.

I cannot give you a better example for first point. My grandfather could buy 1 kg wheat with 1paisa. Today it costs say 10Rs. The value of 1paisa has gone to zero today in real terms. But I can still afford 1 kg of wheat because my nominal wages have increased more than inflation. (Nominal means level of measurement. For eg 1m and 100cm are equal. Just quoting the length as 100cm does not make it longer.) So everyone cares about real wages and it has risen even though my grandfathers 1 paisa almost means nothing in today's world and fit your graph very well. Tomorrow I can just recall old notes and make 1000Rs in the old system=1Rs in the new system. France did it with Francs sometime back.

I told you not to mix hyper-inflation with the argument. If you have read my previous posts on other thread I mentioned creating money out of thin air goes to inflation and I even posted a pdf about it. The point I made above is:

Suppose you are an entrepreneur and you design XYZ flying suits.
No one flies using XYZ suits today. But you create it and now it is available in the market and it has some demand, but it would not get reflected on the inflation indices atleast for another 10 years. But this is increased productivity and people can use it with all the things they were using before. So, if you do not increase money what will it do?? Either XYZ suit will not see light of the day or some other product would die or nothing would die but consumption of all previous goods together would decline to make XYZ suit successful. Now if you use gold dig in a year to add to the money supply, it would probably avoid the above situations. But using a fiat currency and scientifically determining how much money to print depending on productivity increase looks more appealing to me.


MOD Edit: Use terms like XYZ when giving examples.

 

[ejazr]

Free market is capitalism . India Will face the trickle effect- it is already facing it but it wll take sometime to feel it. Just speak about it after some ten years.

PS: still think you are a socialist?

Well its actually true that Free Market and Capitalism are different.

For example, China is an example of a State Capialist economy, but it is NOT a Free market economy,

A good explanation is here

In simple terms, Capitalism is defined as an economic environment comprising basically of two sets of people, owners and workers. An essential feature of this kind of economic system is private ownership. The owner has full control of the means of production and profits are due to him. Production is determined by the free market, as well as the prices for goods and services, plus distribution.

A free market is one that is not regulated by government, but rather driven by demand and supply. The free market theory contends that an ideal free market is where entities are exchanged voluntarily after a seller and buyer mutually agree on a price, without any intervention from external influences.

Capitalism and Free market economy are somewhat entwined as one is an integral part of the other. However, in their true definitions they differ .While capitalism refers more to the production of wealth, the term free market dwells more on the exchange of wealth in various methods. Capital is an essential basic element for both capitalism and free market economies. However, free competition is not an essential element of capitalism but of 'free markets'. This is because in capitalism, capital owners have a lot of dominance over the means of production and as such may yield unfair influence.

It is basic knowledge that land, labor and capital were largely considered to be the classic elements of production but with the growth of the industrial age, the importance of capital became a big determining factor in production because industrial capital gave increased productivity. It was thus feared that inevitably, capital owners would become so powerful that they would be able to profit from the unfair exchange terms they impose.

Free markets do not define capitalism, although they are an essential part of it. Because there's minimal or no influence at all in a free market economy, capital is employed to optimal use. Whereas in capitalism, the free market will determine the price. The concentration of capital and means of production in a handful of individuals or companies distorts the supply side of the free market model.

Summary
Free market is mainly concerned with wealth exchange while capitalism leans more on wealth creation.
Free markets are a key component of capitalism although they do not fully define what capitalism is.
A free market is driven by 'demand and supply' leading to free competition without interference while in capitalism, capital owners can at times influence the terms of trade.

Read more: Difference Between Capitalism and Free market | Difference Between | Capitalism vs Free market Difference Between Capitalism and Free market | Difference Between | Capitalism vs Free market

 

[asianobserve]

Zimbabwe did print a whole lot of paper currency notes when they did not have enough reserves to back up that currency. Do you or do you not agree with that?

This has got nothing to do with Socialism. This is not the case in Vietnam, nor in PRC. This is all about printing money out of thin air.

The question is why did he print so much worthless money? Clue: land redistribution, you cannot get more socialist than this...

 

[pmaitra]

Oil is only valuable because it is an essential industrial ingredient, and industries give us all that we need and want. What does gold do? It's practically just a lump of metal with not much industrial value. The value of gold is purely speculative... it only exist in the minds of speculators (like how monetary values exist in the minds of central bankers...)?

We all know that. Anything that we need, such as oil, coal, iron, uranium, etc., are valuable. Gold does have a lot of industrial uses, apart from being a noble metal. No, the value of gold is not purely speculative. You are dead wrong there. Apart from emotional, vanity, or curio value pertaining to jewelry, etc., gold has many industrial uses as well.

Read more: Gold - Wikipedia, the free encyclopedia

 

[pmaitra]

The question is why did he print so much worthless money? Clue: land redistribution, you cannot get more socialist than this...

Ok, I will ask again:

Zimbabwe did print a whole lot of paper currency notes when they did not have enough reserves to back up that currency. Do you or do you not agree with that?

This has got nothing to do with Socialism. This is not the case in Vietnam, nor in PRC. This is all about printing money out of thin air.

I will repeat my question another 5 times, so that you don't miss it:
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?

 

[asianobserve]

We all know that. Anything that we need, such as oil, coal, iron, uranium, etc., are valuable. Gold does have a lot of industrial uses, apart from being a noble metal. No, the value of gold is not purely speculative. You are dead wrong there. Apart from emotional, vanity, or curio value pertaining to jewelry, etc., gold has many industrial uses as well.

Read more: Gold - Wikipedia, the free encyclopedia

Oil has a more central role in our daily lives than gold...:thumb:

 

[asianobserve]

Ok, I will ask again:



I will repeat my question another 5 times, so that you don't miss it:
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?
Do you or do you not agree with that?

Do you have to ask me that? That's a stupid question that I don't have to answer. Who in his right mind likes the stupid hyper inflation in Zimbabwe...? Dude?

No central banker in his right mind will do what was done in Zimbabwe. Zimbabwe's problems are more political than economic. So the solution for Mr. Mugabe is to neutralise his disastrous political decisions not to print more worthless money.

 

[Sakal Gharelu Ustad]

The question is why did he print so much worthless money? Clue: land redistribution, you cannot get more socialist than this...

It is socialism and wars that lead to unscientific and unabated printing of money!

 

[civfanatic]

A sudden influx of gold into the economy will inflate its price and make it less valuable. This acts as a natural deterrent against countries relying excessively on gold, though countries with large gold reserves will still have an "unfair" advantage when it comes to the gold standard.

Interestingly, however, from a historical standpoint the wealthiest countries in terms of gold and silver bullion did not have large natural reserves of the metals, but acquired them through trade. Pre-colonial India is one such example.