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Thread: Inflation, Gold, Printing Money & Productivity Explained (Part I)

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    Default Inflation, Gold, Printing Money & Productivity Explained (Part I)

    Lets say there is a community of 100 homes. 100 couples each with one kid live in this community. Lets call this community X.

    X has a problem. Because of the kids, parents can't go out in the evening. They come up with a smart plan of leaving their kids at somebody's home.
    In order to be fair, they come up with a coupon system. The holder of a coupon is entitled for 1 evening's worth of baby sitting from whoever is willing to baby sit on that day. With this system, a family can baby sit a kid for an evening and earn a coupon for later use.

    In the next community meeting, X prints 10 coupons and gives it to 10 families by a lottery system. The system works fantastically, families trade coupons for services and couples can actually go out to enjoy the evening.

    Since X's only economic activity is measured by baby sitting,

    X's GDP = 10 Baby Sits / Evening

    After a month or so, there are some visible cracks in the system. There are some families who like to stay home than go out. Due to this, a couple of coupons get parked in those families who only baby sit but never go out.

    Since these two coupons are essentially out of circulation,

    X's GDP = 8 Baby Sits / Evening and X is in a recession

    Also, certain families never get a chance to Baby sit even if they are willing and certain families never get a chance to go out if they are willing essentially creating uneasiness in the situation.

    In the next meeting, they decide to solve the issue. Clearly one needs to Print more coupons. But, how much? One guy who used to work for Fed in the 50s comes up with the idea of Printing Coupons by the amount of Gold X has.
    They find that collectively X has 100 oz of Gold and 10 coupons are currently in circulation. They decide to buy 100 oz of more gold and print 10 more coupons
    Now X has 20 coupons in circulation. But due to earlier parked coupons X's new GDP = 18 Baby Sits / Evening.

    Time goes by, Coupons again get parked at some familes and
    GDP drops to 15 Baby Sits / Evening and X is in another recession

    Next Meeting a Young Guy stands up and says. "What the fuck has Gold anything to do with Baby Sitting? Why are we restricting ourselves to Gold and limiting our Nations productivity?

    We clearly see X has 100 Baby Sitting Supply,
    We also clearly see X has 100 Baby Sitting Demand.
    Since not everyone can go out at once. We have an equilibrium of Supply and Demand at 50.

    So, we need 50 coupons. Lets just print 50 coupons and stop using Gold as a measure of anything. So, X kicks out the 50s Fed guy, his idiotic Gold Policy and makes this new kid the CFO.

    X's GDP (released from unnecessary bind to Gold) has shot up to
    45 Baby Sits / Evening.
    Fed Prints 5 more coupons to bring the Capacity to full 50 Baby Sits / Evening

    By now, you should at least have understood why
    i) USA came out of the Gold Standard (Instead of believing in idiot conspiracy theories, appreciate the fact that Gold has nothing to with Nations Wealth anymore and hence is useless)
    ii) Why Fed needs to print money from time to time (To Combat recession and the fact that some people just hold on to money)

    Part II, I'll explain inflation and productivity using the same example

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    In the 15th and 16th Century, Gold determined the Wealth of a Nation. Hence, the amount of money needed was directly related to Amount of Gold a Nation has. Hence it made sense to print money which was related to Gold

    By the 21st century, a Nation's wealth is determined by pretty much its intellectual capacity, its manufacturing capability, its servicing capability its food growing capacity, its transportation and communication networks, its universities, its capital markets. None of this has anything remotely related to Gold.

    Why is Gold still traded at high prices?
    Every kid in every country is told stories of Kings and Queens, Magicians & Thiefs and every story they are bought up with one single concept.
    Owning Gold is the greatest thing. Gold = Wealth. Gold = Riches. If you have Gold you are the King and you own a harem. When everyone has this Gold concept ingrained they artificially inflate its actual worth and drive the price up.

    It is much easier to sway the masses by saying
    i) Gold will always have value by telling stories of Kings
    than convincing them
    ii) Intellectual Property is Billion times more worth than Gold

    Unless we get a modern Aesop, who tells stories of Bill Gates and Warren Buffetts in a fun way, Gold's prices will be artificially inflated. Or the Markets around the world one day just realizes Gold is just an ornament piece.

    When will it happen? Next Month? 5 years?, 100 Years? God knows. What prices will Gold trade? Anywhere between $45 (Marginal Cost of producing Gold and hence its true Price) to $50,000,000 (Never underestimate the power of human imagination or sheep mentality)

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    ^^^ your babysitting coupon system has a fatal flaw ... actually more than one. First, it does not allow for the trading of other certificates offered by other communities ... communities that are the only source of vital commodities needed by the first community ... but who refuse to accept the first community's certificates as an 'equal exchange of value' because the implied promise behind the first community's certificates has no direct value in the second community (assume it is too distant to travel between the communities to actually exercise babysitting services promised by the first community's certificates). The second community demands some sort of more universal exchange of 'value', instead of an empty paper promise from the first community (from the second community's point of view).

    Another problem exists in the form of real world scarcity. Suppose someone in the first community invents distilled alcoholic spirits, such that suddenly some percentage of the first community's residents are chronically too drunk at night to be trusted to babysit. Thus there are now twice as many people seeking babysitting services than their are trustworthy babysitters. The trustworthy babysitters decide that if they are going to have to give up the privelege of getting drunk in order to provide babysitting service to another resident (so THEY can go out and get drunk instead), this should now be worth TWO certificates instead of just one. Faced with an ultimatum of paying two certificates in order to escape from their kids, or being forced to stay home - listening to screaming brats - changing diapers themselves etc. enough community members decide to pay the two certificates that it now becomes the new 'standard' price (and the 'value' of each certificate is thereby cut in half).

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    Quote Originally Posted by Melonie View Post
    ^^^ your babysitting coupon system has a fatal flaw ... actually more than one. First, it does not allow for the trading of other certificates offered by other communities ... communities that are the only source of vital commodities needed by the first community ... but who refuse to accept the first community's certificates as an 'equal exchange of value' because the implied promise behind the first community's certificates has no direct value in the second community (assume it is too distant to travel between the communities to actually exercise babysitting services promised by the first community's certificates). The second community demands some sort of more universal exchange of 'value', instead of an empty paper promise from the first community (from the second community's point of view).

    Another problem exists in the form of real world scarcity. Suppose someone in the first community invents distilled alcoholic spirits, such that suddenly some percentage of the first community's residents are chronically too drunk at night to be trusted to babysit. Thus there are now twice as many people seeking babysitting services than their are trustworthy babysitters. The trustworthy babysitters decide that if they are going to have to give up the privelege of getting drunk in order to provide babysitting service to another resident (so THEY can go out and get drunk instead), this should now be worth TWO certificates instead of just one. Faced with an ultimatum of paying two certificates in order to escape from their kids, or being forced to stay home - listening to screaming brats - changing diapers themselves etc. enough community members decide to pay the two certificates that it now becomes the new 'standard' price (and the 'value' of each certificate is thereby cut in half).
    I will complete the inflation, productivity parts and respond to your comments.

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    This is a really interesting thread. It motivates me to go to the library and learn basic economics. However, after reading this, my thought is, "Why are we bothering with the money system at all?" I am something of an anarcho-primitivist.
    Quote Originally Posted by CuriousSeeker View Post
    ^Pssssttttt, your stripper is showing.

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    "Why are we bothering with the money system at all?
    because a huge percentage of American 'profits' stem directly from the existance of the current money system. For some perspective, 25% yes 25% of ALL New York State tax revenues stem directly from wall street !!!

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    Quote Originally Posted by xanfiles1 View Post
    In the 15th and 16th Century, Gold determined the Wealth of a Nation. Hence, the amount of money needed was directly related to Amount of Gold a Nation has. Hence it made sense to print money which was related to Gold

    By the 21st century, a Nation's wealth is determined by pretty much its intellectual capacity, its manufacturing capability, its servicing capability its food growing capacity, its transportation and communication networks, its universities, its capital markets. None of this has anything remotely related to Gold.

    Why is Gold still traded at high prices?
    Every kid in every country is told stories of Kings and Queens, Magicians & Thiefs and every story they are bought up with one single concept.
    Owning Gold is the greatest thing. Gold = Wealth. Gold = Riches. If you have Gold you are the King and you own a harem. When everyone has this Gold concept ingrained they artificially inflate its actual worth and drive the price up.

    It is much easier to sway the masses by saying
    i) Gold will always have value by telling stories of Kings
    than convincing them
    ii) Intellectual Property is Billion times more worth than Gold

    Unless we get a modern Aesop, who tells stories of Bill Gates and Warren Buffetts in a fun way, Gold's prices will be artificially inflated. Or the Markets around the world one day just realizes Gold is just an ornament piece.

    When will it happen? Next Month? 5 years?, 100 Years? God knows. What prices will Gold trade? Anywhere between $45 (Marginal Cost of producing Gold and hence its true Price) to $50,000,000 (Never underestimate the power of human imagination or sheep mentality)

    Are you kidding us? What have you been reading now?

    In the past I have seen you challenge Mel about her tips and trades and whether she can make a profit. And here you are predicting some time between the next month and 100 years that gold will trade between $45 and $50,000,000.

    WTF?

    I'm sorry to do this to you Xan. I'm sure you are a nice person.

    But, you need to go read some of the Austrian school and learn about gold / hard money / inflation and Adam Smith and the actual book The Wealth of Nations where you can learn about why paper money was actually invented.

    Once you understand this stuff, I promise, you will look back on your above posts with horror. Economic theory, they are not.

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    Default Re: Inflation, Gold, Printing Money & Productivity Explained (Part I)

    First of all, I havn't even explained Inflation in my post and yet you come up some bull shit.

    Second, You (and most of the shady websites) have a gross misinterpretation of Austrian School of Economics

    Anyway, I challenge anyone who predicts prices. Prices are determined by irrationality of human behaviour. If you think you have the insight into irrationality of humans, then clearly you are an idiot (I'm sure you are a nice person too)

    Even Google with their 1 Trillion 'Database of Intentions' can't predict prices.

    If anyone can predict price, banks can easily hire them and turn their 1 Trillion Dollar assets into $100,000,000 Trillion Assets within 5 years. Yet, they write down Billions of Dollars.

    Studies have proven Monkey with darts beat expert analysts in guessing prices.

    Since we are recommending boks here, I suggest you read 'Fooled by Randomness' by Taleb

    Don't worry. I have read Economics books from Adam Smith to Ricardo to Marx to Kaynes to Friedman to Ben Bernanke and the Co-op baby sitting is the most comprehensive and elegant example to explain lot of economic things

    The only way to consistently make money is to buy Assets below their Value. (Graham, Buffett, Lynch et al)

    And finally I don't even know what point are you attacking
    i) The fact that I didn't give you the exact price that Gold would trade?
    ii) That I told Gold doesn't matter in the modern world
    iii) The Elegant Baby Sitting example itself

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