Our understanding of monetary system is wrong?

[trefoil]

Quote from texrex2002:

Good post, but I think this last paragraph may be misleading. In the case of the grocer getting a dollar and then passing it down the line, it is the same dollar that transacts 7 times (that doesn't count as $7 worth of activity).

What (I believe) actually happens is that the grocer, the supplier, the packager, the farmer, etc., take a portion of their profit from the transaction (say 10% of their 15% profit, or 1.5% of the transaction value) and put it in the bank. the bank then lends out 7-10x the deposit, and THAT is what causes the money to multiply. Note that the original dollar doesnt make it very far through the chain, since every party takes a profit.

In parallel, the 90% of the 15% profit that is not saved by the grocer is likely spent on other (non-primary) goods and services that each then spawn other streams of profit-taking saving and re-spending.

It might be interesting to think about whether the type of good the $ is spent on makes a big difference in the length of the chain and the flow through of the original dollar. Spending it on a Supercomputer involves a huge string of suppliers, credit, salesforce & other overhead, whereas spending it on a ... I don't know, painted pebble at a trinket shop on the indian reservation has less of an effect. But then again, the profit margin is much larger on the latter transaction, so if the profit is then in turn spent on a tractor payment (or at the liquor store...) it starts it's own chain quickly...

I posit that the last paragraph may be total BS; was just musing...

Actually, truehawk described a complex urban economy quite well, and your musing leads you to the same place.
In a big industrial city, most of the business transacted is between businesses. The retail end that actually contacts the consumer is quite small, in comparison.
For instance, Mayor Bloomberg of NYC's company makes the majority of its money selling its goods & services to big financial firms. Only a minor part of its business involves radio, TV, and the web, and that's the only part the ordinary consumer would see.
On a rural Indian reservation, the chain would be much smaller, and the part of the economy in direct contact with the consumer much larger.

 

[moo]

Quote from Random.Capital:

You can't "solve" the problem. It is inherent to the nature of money/debt. Cyclical blowups like the one we're currently experience are part and parcel of the nature of things. It happens with fiat money and it happens with metal-based "hard" currencies.

The problem can very well be solved by forbidding fractional reserve banking, a totally absurd system. With 100% gold-backed money, and no ability for banks to create money out of thin air, we will see no more huge bubbles and crashes.

 

[Traden4Alpha]

Quote from moo:

The problem can very well be solved by forbidding fractional reserve banking, a totally absurd system. With 100% gold-backed money, and no ability for banks to create money out of thin air, we will see no more huge bubbles and crashes.

You want to run a real-time global economy of 6.6 billion people with only 4.6 billion ozt of physical gold? Good luck!

BTW, gold-backed economies have bubble and crashes, too.

 

[moo]

Quote from Traden4Alpha:

You want to run a real-time global economy of 6.6 billion people with only 4.6 billion ozt of physical gold? Good luck!

So what? The obvious solution for this so-called problem is price. Add a zero to the price of gold, and there may be enough. If not, add another zero.

BTW, gold-backed economies have bubble and crashes, too.

Only if they allow fractional reserve banking . Do you understand what that is??

 

[Stosh]

Moo.....I'm beginning to think you may be right. We need some way to keep these "masters of the universe" from managing the money supply. Human beings just aren't that smart, even if they have a Ph.D. from Harvard or Wharton. (and even if they were capable of being independent from partisan politics). Stosh

 

[Traden4Alpha]

Quote from moo:

Quote from Traden4Alpha:
You want to run a real-time global economy of 6.6 billion people with only 4.6 billion ozt of physical gold? Good luck!

So what? The obvious solution for this so-called problem is price. Add a zero to the price of gold, and there may be enough. If not, add another zero.

Yes, and that "adding another zero" just makes gold another fiat currency! Who decides how many zeros to add and what stops them from adding or removing zeros as they see fit? If government sets the price of gold at $100,000/ozt, that's just as much a fiat decision as any with the current USD. Nothing stops politicians or central banks changing a gold-based currency at will by fiat.

Gold + zeros is just paper money made out of a shiny metal.

I also can't the see the United States allowing it's currency to be controlled or affected by the gold supply operations of Russia or South Africa. Using a gold-backed currency basically gives tremendous financial power to foreign gold producers, especially if the price of gold is set by fiat to a very high price.

So, gold + zeros is just paper money made out of a shiny metal (and printed by other countries).

 

[harkm]

You let the gold price float. It will go where it needs to be. The key is that gold cannot be created out of thin air. Who cares who mines the gold? The productive economies will acquire it through trade.

 

[texrex2002]

Quote from Traden4Alpha:

If government sets the price of gold at $100,000/ozt, that's just as much a fiat decision as any with the current USD. Nothing stops politicians or central banks changing a gold-based currency at will by fiat.

So, gold + zeros is just paper money made out of a shiny metal (and printed by other countries).

I can fathom the gov't saying that gold is worth so-and-so much of whatever their currency is, but I have a harder time thinking that they can declare how may cans of tuna, or pairs of shoes gold is worth, unless they completely wall the country in and hire legions of men to fill in all the tunnels dug under the wall. if 1oz of gold buys only 3 pairs of shoes in the US (by decree), but it buys 400 pairs of shoes in Mexico, guess where all the gold (and gold owners) will go...

 

[Traden4Alpha]

Quote from harkm:

You let the gold price float. It will go where it needs to be. The key is that gold cannot be created out of thin air. Who cares who mines the gold? The productive economies will acquire it through trade.

You can't have a gold-based currency AND let the price of gold float -- that's a complete contradiction. The essence of a gold-backed currency is that a fixed number of currency units are backed by a fixed quantity of gold. Let the price float and currency units can be created out of thin air by changes in the price of gold.

And in a world where all economic expansion requires new gold (unless you allow fractional reserve banking), the miner of gold become extremely rich. Its no different than our geopolitical problems with black gold or oil (which also can't be created out of thin air but can be mined from certain countries and acquired by productive economies through trade). I doubt that any Western government would cede sovereignty over their currency to the Organization of Gold Exporting Countries.

 

[IanMacQuaide]

As one who admits his ignorance of economics, I've looked at the big picture and it's telling me this:
Collectively, "we" aren't wrong in our understanding of the monetary system, but our information is incomplete.
There are forces at work that we have no concept of, let alone specific knowledge.