December 16, 2008

That What I Want

Money. We use it every day, we work to get more, we save (some of) it (hopefully) for a rainy day. But what is it? You might think of paper money as sort of an easier to carry stand-in for gold coins, and that was true for our great grandparents but not anymore. So is money now just an abstract concept no more real than the number 5 or 68 or 23,968? Were does money come from? The government prints it but is that the same as creating it? Does the government have a monopoly on creating it? Will answering any of these questions help me understand what is going on in the economy today?

I think the answer to the last question is, "Yes". The most helpful explanation I've found is Money as Debt. It isn't perfect. It seems to include several dubious quotes. But it does seem to do a good job of explaining how the business of money works overall. It's almost an hour long, the last 20 minutes includes some of the filmmaker's proposals for changing the system that I don't think would work, and the first 20 minutes is spent on an introduction that might seem so obvious that you don't think watching the rest is going to teach you anything. But you'd be wrong. Unless you already own a bank I promise you will have an "ah ha!" moment watching that middle 20 minutes.

After watching it I looked at what is going on in markets today and tried to apply my new understanding to explain what was going on. Banks and investors were writing off bad debt essentially destroying money so that would explain the deflationary pressure we've seen in asset prices. But on the other had the government bailouts have created new promises to pay (t-bills) so shouldn't that balance things out? Why are we still seeing deflationary pressures and the economy sinking? Then I read about The Velocity of Money. It's really, really long. It's not like a book, more like a really long short story with math. The short version is: you can print all the money you want but you won't get any inflation if people don't spend it.

Anyway, that's my blog post for today. Two informative links for you if you're bored (and if you're reading my blog you probably are). Anyway, light blog posting until after the holidays and I get the new blog software installed.

Posted by thom at December 16, 2008 12:50 PM
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