Kerostasis

I realized what struck me wrong about this example. Your description of how money supply is created is pretty much accurate. But your conclusion about inflation is way off base.

In the starting scenario, with $1000 of money supply available, what value does that represent? So far nothing, but for the sake of example lets assume the bank sold $1000 worth of furniture yesterday to generate that capital. (Unlikely? Sure, but it prevents us from dividing by 0 later on, so lets go with it.) So the $1000 in the bank represents the ability to acquire Bank Furniture.

Now you take out the loan and buy "Home Improvements". These Home Improvements do not actually exist yet, but you have paid the contractor to create them. He creates $1000 worth of Home Improvements on your house, and takes your cash back to the bank.

Now I take out a loan and buy "Car". That car wouldn't have been made at all if they weren't going to be able to sell it to me, but since I have the loan handy the dealership acquires a cheap car, sells it to me, and deposits $1000 at the bank.

Ok, lets look at our money situation and see if we have inflation: How much money is available to this micro-economy? The bank still has $1000, and the dealer and the contractor each have a $1000 account, for a total of $3000 in the economy. So what value does that $3000 represent? At the start of the day we just had $1000 worth of furniture, but now we have $1000 of furniture, $1000 of Home Improvements, and a $1000 Car. The money supply has increased to match the increased value of our goods. So there has been no inflation at all!

By contrast, if the bank was unable to make those loans, we would either have severe deflation, with $1000 of cash trying to make up for $3000 of goods, or some of those goods wouldn't have been produced at all, leading to a slower economy.

In short, expansion of the money supply is not inherently bad. It just needs to be controlled to expand at about the same rate as the economy.

(Note -- the example works much better under the assumption that the micro-economy is closed and doesn't need to purchase materials from outside, ie, the most significant business cost is cost-of-labor. The Dealership will violate this principle because they are most likely purchasing the car ready-made from a Car Manufacturer that isn't included in our micro-economy, but its too complicated to follow the cost of the car all the way back to the iron mine that gave us the raw metal -- so for sake of example we're just including the dealer.)

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ScratchMonkey

It may help if you think in terms of bling coins (previously known as gold) instead of dollars. The paper things we carry around are notes that were once good for redeeming in bling coins dropped off at a bank.

Hence, to say someone has $1000 is ambiguous: Does he actually have 1000 bling coins, or does he have a note that can be redeemed for the ones he left at the bank?

The notes are valuable only because we can give them to someone to redeem for the coins.

Except that there's no "real" $1000 involved, just promises of future redemption for the original $1000 of bling coins sitting in the bank.

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Sig

AMosely

The actual state of the union was not delivered at all. What you read/heard instead was the dying breaths of an increasingly ignorant and isolated President and administration. If that isn't true and the administration is in fact paying attention, then he must realize that the state of the union is precarious for a large percentage of Americans and that public sentiment is overwhelmingly negative toward his policies on the war and economy. Instead of being honest about this, or even giving it mention, he has the nerve to request that the $50+ billion in tax cuts remain in place despite an estimated $400+ billion spending deficit. Even worse, he makes the claim that "Next week, I'll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012." When Bush took office there was a $250 billion surplus. Spending on the war on terror is spiralling into the trillions of dollars. Why not just come out and say "I @#%ed you, America!"

And what about Iraq and the 'greater war on terror', which received very little attention this time around. In the speech, Bush claimed that "the Iraqi people quickly realized that something dramatic had happened. Those who had worried that America was preparing to abandon them instead saw tens of thousands of American forces flowing into their country." Exactly who was worried - what percentage of the population? Or perhaps it was just the American-backed politicians there, and what they relayed to the American ambassador? Every independent poll conducted of Iraqi citizens consistently shows a majority in favor of complete American withdrawal. How did those people react to the dramatic uptick in American forces? Be honest - the surge was needed because there weren't enough boots on the ground to sufficiently police the country (and there still aren't), especially since the largest remaining non-American force in Iraq is that of South Korea, with only ~2000 troops. America is not withdrawing from Iraq because it would not only undo what has been 'achieved' there in the past five years, it would render the country even more of a terrorist haven and hotbed for anti-American sentiment than it was under Hussein (which was not much).

53 minutes is all that could be generated for our disenfranchised union. This state of the union was a pack of lies, at least from my viewpoint. Even if you do happen to agree with Bush's point of view, you should at least realize that it sends a message of failed democracy to the rest of the World.

bkelly

Agreed

It doesn't because outsdanding stock is capital. From the company's perspective the trade converts one asset into another.

And even with an investor/investee transaction, consumption won't change.

I'm not sure how you can assert that an unknown person with your $600 is as good for the economy as you buying $600 worth of stuff. That individual could sit on the money, destroy it or ship it out of the country.

Also your argument continues to assume you can pinpoint the effects of your actions in a very complicated system- someone now has your cash. Although I can't say the perspective is wrong, I'm as comfortable with it as claiming that the ice cream I ate last week is directly responsible for the fat I have in my big toe this morning.


No, there would be inflation. The example is just a bit confusing because I specified durable goods which depreciate. What would happen to this sample economy if instead of home improvements and a car we purchased a family dinner and a vacation?

You're right but you're getting a bit off topic. My point here to ScratchMonkey was that a 0% bank reserve requirement would allow the money supply to expand without limit.

Of course. These are simple examples to illustrate a concept or two.

bkelly

bkelly

Nope, money has not been attached to gold or "bling coins" since 1934. Money only has value because we believe it to have value.

Look at the dollar notes we issue today. Does it claim to be a gold certificate? Is it redeemable for anything? No. It only claims to be legal tender for public and private debts.

There is no "real" original $1000 of bling coins either. The created $2000 has all the characteristics of the original $1000 - nothing but the system to prop it up.

bkelly

mentholated

Fortunately we are going back to the gold backed currency in the very near term as we switch to the Amero, now that the dollar is nearly defunct due to banking fraud.

Kerostasis

Allow me to clarify with an example. Company A has an IPO issue and prints 2000 shares of stock. 1000 shares are sent to the brokerage and are purchased by investors, and the other 1000 shares sit in the company bank vault. We both agree that this transaction takes cash out of consumption in favor of Investing, you just complained that IPOs are too rare and complicated to be significant.

Next month, after those 1000 shares have reached a stable market price, the company decides they need more capital to invest in a new factory. They go grab 200 of those extra shares from the bank vault and go sell them on the stock market floor, in a transaction that looks identical to the transactions already occurring between investors trading the 1000 shares already there. The difference is that instead of cash going into the market through one set of hands and immediately leaving it through another set, this time the cash is turning into investment capital because the company is selling its own stock. Consumption has decreased and Investment has increased, without any of the hassle of an IPO.

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bkelly

I'm pretty sure I get it. What you describe just doesn't get any money to the company. Let me build on your example.

Great, in addition the issuing bank needs to put a starting price on an IPO. In our case, let's say the bank bank puts the company's value at $20,000 and so it sets the price of the stock at $10. ($10 per share * 2000 shares total = $20,000 total)

So now 50% of the company worth about $10,000 is owned by the marketplace.

The other 50%, also worth about $10,000 remains in the company bank vault.

Hmm, I may have agreed with you too quickly before then. I was thinking "dollars put into stocks actually leave the realm of consumption" meant "cash moves from the market to the company". I would still call money on either side "investing" and I still believe money is not transfered to the company in a purchase of stock on the market or in an IPO.

Okay, let's say the market agrees with the $10 price and it remains.

Sure, let's assume prices and ownership benefits remain constant for a moment and see what happens.

Start> The company has 1000 shares of itself worth $10 a share in it's vault for a total asset value of $10,000.
Trade> The company sells 200 shares of itself for $2000.
End> The company has $2000 and 800 shares of itself worth $10 a share in it's vault for a total asset value of $10,000.

So the working capital that the company posessed before and after the trade remained the same. The transaction only converted an asset to a more liquid form which could be required to purchase a factory but doesn't change the money the company has available to use. To a company, selling its own shares isn't much different than taking out a loan and a company in need of cach may consider both options.

If your argument is that the stock reserves upon which the company sits isn't money then you might want to look at the recent bid by Microsoft for Yahoo. They offered $31 a share payable in either cash or Microsoft stock.

But this isn't even true if we remove the assumptions from the above section. A company selling its own stock is a concern for an investor for two reasons:

1) The supply of publically available stock is going up and since demand remains the same, the market price per share will probably drop. In our example, if we owned the outstanding 1000 shares and the company selling an additional 200 shares to a third party causing the price to drop to $9.50, we lose $500. (The company devalues its own holding as well.)

2) A company selling too many of its own shares could open itself up to an unfriendly takeover.

Your thoughts?

bkelly

Kerostasis

My first thought is that we have drastically different views on the nature of stockholding. I'm not particularly sure we can come to an agreement on this at all.

Lets start with a single point:
For the sake of example, we'll agree the company was worth a total of about $20,000 before the IPO. After the IPO, the company has just received a check from the brokerage for $10,000. Their net worth has changed -- it is now $30,000. The corporation still has all the assets it had before the IPO, and now has an additional $10k in cash that it can use to INVEST in increased production.

Explain how this does not represent "money transferred to the company".

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bkelly

No, perhaps not.

No, after the IPO the company's net worth is $20,000. It's really quite simple so let me explain it without the jargon.

Given> Company is worth $20,000.
Start> Company owns 100% of itself worth $20,000.
Trade> Company sells 50% of itself for $10,000.
End> Company now has $10,000 cash and owns 50% of itself worth $10,000.

bkelly

Kerostasis

I disagree entirely. The previous owners of the company still have the same net worth, since they now own only a portion of the company instead of the whole thing. But the company itself is more valuable by virtue of the increased Equity investment in the company.

And if we can't agree on the meaning of equity, then I think this conversation has gone as far as its going to go...

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bkelly

All right. Personally I think investing your $600 is the best thing you can do for yourself. After all, we're going to have to pay off the loans the government is taking out for this stimulus.

bkelly