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It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. The reason that money has value is

It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. The reason that money has value is because the government will demand a certain amount of it as taxes. The amount of money created -- whether by "traditional" mechanisms such as interest on sovereign debt, or more ad-hoc helicopter deposits -- is balanced against money to determine the value of a currency. Bonds are a temporary removal of money from the economy. You give the government $95 today, and they promise to pay you $100 in 10 years[0]. Whether that's a good deal depends on the expected inflation rate. Gold is therefore not a bet on the presence of inflation, but on the (predicted) relative ratio of inflation vs same-currency sovereign bonds. If the dollar is inflating at 3% and a 10-year treasury yields 1% then gold is a great investment, but flip those numbers around and it changes from a currency hedge to a plain commodity. [0] Or, if you're buying a German bund, you pay $101 today and get back $100.

js8 6y ago
Your view is exactly the position of exogenous money theorists. My point is, there is the other view. > It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. Well, depends on how you define money. In exogenous theories, money are defined extensionally, by listing examples of money, i.e. money is what government issues. However, in endogenous theories, money are defined intentionally, by their properties, i.e. money is something that has not value in itself (have no use value), but can be readily exchanged for something that is valuable (have exchange value). (And then in practice, you have different indicators M1, M2, M3, ..) > The reason that money has value is because the government will demand a certain amount of it as taxes. This is different in the endogenous theory, money simply have value because people deem them to have value. It's not necessarily because government says, "this has value". Bitcoin is obvious counterexample, it has exchange value. > Bonds are a temporary removal of money from the economy. Under the intentional definition of money this is not true. If those bonds can be further traded between the creditors, then they will act as money (they will become a thing that can be exchanged for something else valuable). And you can see that amount of money in the economy increased, because now the original money paid for the bond and the bond itself is potentially in circulation, and can be spent on goods and services at the same time. So bond creation creates new money, and its repayment will destroy the new money. The endogenous theories are built on the observation that there is systemic similarity between a banknote and a bond, they are both intrinsically worthless pieces of paper that represent value for which they can be (possibly) exchanged in the future.

js8 6y ago

Your view is exactly the position of exogenous money theorists. My point is, there is the other view. > It's worth distinguishing money, which is created by government regulation, from other forms of wealth and stores of value. Well, depends on how you define money. In exogenous theories, money are defined extensionally, by listing examples of money, i.e. money is what government issues. However, in endogenous theories, money are defined intentionally, by their properties, i.e. money is something that has not value in itself (have no use value), but can be readily exchanged for something that is valuable (have exchange value). (And then in practice, you have different indicators M1, M2, M3, ..) > The reason that money has value is because the government will demand a certain amount of it as taxes. This is different in the endogenous theory, money simply have value because people deem them to have value. It's not necessarily because government says, "this has value". Bitcoin is obvious counterexample, it has exchange value. > Bonds are a temporary removal of money from the economy. Under the intentional definition of money this is not true. If those bonds can be further traded between the creditors, then they will act as money (they will become a thing that can be exchanged for something else valuable). And you can see that amount of money in the economy increased, because now the original money paid for the bond and the bond itself is potentially in circulation, and can be spent on goods and services at the same time. So bond creation creates new money, and its repayment will destroy the new money. The endogenous theories are built on the observation that there is systemic similarity between a banknote and a bond, they are both intrinsically worthless pieces of paper that represent value for which they can be (possibly) exchanged in the future.