The Achilles heel of the economy

[Nev]

If trading in company capital on the open market was banned, there could be no more boom and bust cycles caused by dramatic changes in fickle confidence, while an investor could still sell his shares in a company, but only for their real, book value and not for a fictional market price. If banks were no longer run for profit, there could be no more catastrophies caused by reckless profiteering in the banking community. If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost. Finally, if a common global currency was established, the benefits to international trade would be enormous.

The only barrier to such changes is the popular delusion that trading in money can somehow make more money, when in fact such a trade is a rapacious parasite which feeds on the flesh of the real wealth-creating world of work and, by its nature, resists all efforts to treat or control it.

 

[Evo]

If banks were no longer run for profit, there could be no more catastrophies caused by reckless profiteering in the banking community. If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost..

Well, there would be no more banks and no more loans. What do you propose to give the bankers and loan makers in return for the use of their services and money?

 

[russ_watters]

Where can I find the "real, book value" of a company?

 

[russ_watters]

Well, there would be no more banks and no more loans. What do you propose to give the bankers and loan makers in return for the use of their services and money?

And does this mean my money market account won't generate interest anymore? :(

 

[Evo]

And does this mean my money market account won't generate interest anymore? :(

Doesn't sound like it. :tongue:

 

[Nev]

The government would fund the banking system, the banks would still make loans to businesses and individuals and would provide a government service, just like the many services the government already provides. Governments already give grants, so in the government run banking system they would be more than happy to give loans as they would be repaid, and they would get their money back, or at least most of their money back as no one wants to be blacklisted for credit or made bankrupt.

 

[Nev]

Where can I find the "real, book value" of a company?

The book value of a company is made clear in the accounts which can usually be inspected and are often published.

 

[DanP]

The government would fund the banking system, the banks would still make loans to businesses and individuals and would provide a government service, just like the many services the government already provides. Governments already give grants, so in the government run banking system they would be more than happy to give loans as they would be repaid, and they would get their money back, or at least most of their money back as no one wants to be blacklisted for credit or made bankrupt.

Until you don't live in a Communist country, you don't realize how utterly misguided is to have the government be involved in such degree in the life of the citizens of a country. This would be a step towards totalitarian communism, with more to follow in it's wake.

Second, you have to ask yourself from where the government would get the money to finance a banking system in a country with 200M ppl. Its unrealistic.

 

[dacruick]

DanP beat me to it, although he seemed to take some offence to your post.

From an idealistic point of view you could be very well correct. But I think your system is impractical. Notably where you said company shares should only be sold for their real value. That means that you would have to discount a companies potential altogether. Once you discount potential, you then make it impossible for new business opportunities to arise. You constrain peoples ability to make money, and also their ambition. I think your idea would choke out human innovation.

 

[skilgannonau]

If trading in company capital on the open market was banned, there could be no more boom and bust cycles caused by dramatic changes in fickle confidence, while an investor could still sell his shares in a company, but only for their real, book value and not for a fictional market price. If banks were no longer run for profit, there could be no more catastrophies caused by reckless profiteering in the banking community. If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost.

This kind of economy already exists, it's called North Korea. In the past it has also been known as the 'dark ages'.

 

[talk2glenn]

The book value of a company is made clear in the accounts which can usually be inspected and are often published.

Since his wit appears to have escaped you, allow me to be direct: russ was trying to make the point that there is no such thing as "real" value for anything, including companies. What you mean by "book" value is just a simple accounting of the companies assets. Obviously, this is of limited utility in valuing an enterprise. Transferring all of Microsoft's auditable assets to, say, 7 Eleven wouldn't make the new 7 Eleven nearly as valuable as the old Microsoft. Taking it further, giving them to a native tribe somewhere in the Amazon would create even less relative wealth. I'm also curious how one would even go about finding a value for much of what is defined as "book assets" in the absence of organized capital markets?? Does a table have "real" value? How about something more abstract, like a swap, contract, invoice, employee, patent, etc?

Think before you speak (or type, as the case may be).

If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost.

Interest on loans is an incentive to lend, and a disincentive to borrow. Let's ignore the obvious for a moment, and pretend there were still loans to be borrowed in an interest-free marketplace. What incentive does a borrower have to invest capital wisely if it can be borrowed interest free? After all, if he loses it in some reckless and ill-conceived venture, he can just borrow more (without interest) to repay the lost principal (also without interest). Sounds a little bit like a boom & bust cycle, to me.

Returning to the obvious, what incentive do borrowers have to lend, in the absence of a return on principal? Benevolence?

Finally, if a common global currency was established, the benefits to international trade would be enormous.

Clearly, the lesson of Bretton-Woods escapes you. First, why do different exchange rates exist between currencies? Second, do fixed exchange rates remove the systemic variations that give regional economies unique values relative to their neighbors? Third, if not, then what consequence do you think having a common exchange rate will have?

 

[russ_watters]

The book value of a company is made clear in the accounts which can usually be inspected and are often published.

So you mean the "book value" of a company is based on how much money it has? Why would anyone by a quantity of money for an equal quantity of money? Er...well maybe because they get the building, the machinery, the customers, the projected future sales and the intellectual property for free?

How does one determine the price of a used car? A house?

Sorry, new markets will spontaneously pop up to buy/sell things even if the existing ones are demolished. That's one of the fundamental flaws in Communism, the belief that markets don't need to exist.

 

[russ_watters]

Since his wit appears to have escaped you, allow me to be direct: russ was trying to make the point that there is no such thing as "real" value for anything, including companies.

I really don't do it to be snarky (well - the comment to Evo was...). I hope to use questions to spur thought - it's better to lead one to the right answer than to just hand it to them...

...but you're right, if that doesn't work, the direct approach becomes necessary.

 

[Nev]

I did not intend to promote the concept of a totalitarian communist state. I sincerely believe a free market economy is essential to economic prosperity, but only in the production and supply of useful goods and services. I also accept that the value of any commodity or service, including that of a patent or useful computer service, depends on how much the buyer is prepared to pay. I guess that equates to the real value of any commodity or service. I also see the payment of dividends as a just reward for investors.

However, I do believe that trading in the money supply on the open market creates more problems than it solves. One doesn't need to be a rocket scientist to see the flaws in the world's current banking system, where greed for profit has brought some economies to the point of collapse and caused a major recession. There is nothing wrong with a mixed economy, where private enterprise can flourish and is supported, not milked, by a sane and sensible free banking service funded and managed by the government, like any other government-funded service.

By the same token, it doesn't need me to remind the reader of the infamous Wall Street Crash, when a boom in share prices led to a rush to sell for profit, which in turn led to a wave of panic-selling as share prices plummeted, thereby depriving many viable companies of working capital and triggering their collapse and the ensuing Great Depression of the 30's.

A stable financial system is vital for business to thrive, and money was invented to facilitate the exchange of useful goods and services in complex economies. If we gamble and play with the means of exchange, we clearly risk bringing the house tumbling down!

 

[Lievo]

a sane and sensible free banking service funded and managed by the government

In your view, what could make governmental banking service automatically saner?

If we gamble and play with the means of exchange

What is the difference between gambling and a sane prediction that the exchange rate is not sustainable at its current value?

 

[Nev]

In your view, what could make governmental banking service automatically saner?


What is the difference between gambling and a sane prediction that the exchange rate is not sustainable at its current value?

A government run banking system not run for profit would not make reckless loans in search of profit, which in my opinion makes it saner.

A common global currency make take some time to achieve and there would be some nation states with differences in economic activity just as there are between the north east and south east of England which have a common currency. However, no expert in economics can predict the outcome of any changes to the current economic system.

 

[Lievo]

A government run banking system not run for profit would not make reckless loans in search of profit, which in my opinion makes it saner.

It may make reckless loans in search of profit for lobbyists, which in my opinion makes it worst. I see your point however, but why not advocassing for cooperative financial groups for example? It seems the best of public and private worlds.

no expert in economics can predict the outcome of any changes to the current economic system.

That's strange to bases one's own opinion on a claim of overall ignorance. If no one knows, everything can work and there is little point discussing it. Indeed, that's not exactly true that no one knows, especially because euro gives us a whole scale experiment.

there would be some nation states with differences in economic activity just as there are between the north east and south east of England which have a common currency.

In short, for this to work there's a need for a redistribution from richer lands to poorer ones. This would be generous, but the question is: how much increases in you tax would you accept to make a common currency with, say, the United Mexican States? Not to mention the rest of the world...

 

[brainstorm]

What incentive does a borrower have to invest capital wisely if it can be borrowed interest free? After all, if he loses it in some reckless and ill-conceived venture, he can just borrow more (without interest) to repay the lost principal (also without interest).

What if he could only borrow more once the original loan was repaid?

How does one determine the price of a used car? A house?

Say you build a house and you want to build another house. How do you get the materials to build it? By trading your old house in. Are you supposed to contribute the labor for free, you ask? "What else do you have to do with your time?" would be my answer.

Sorry, new markets will spontaneously pop up to buy/sell things even if the existing ones are demolished. That's one of the fundamental flaws in Communism, the belief that markets don't need to exist.

That assumes that existing things ARE demolished. It actually takes labor and capital to demolish things, though, so it sometimes makes more sense to dump unwanted property instead of demolishing it. Markets only exist to the extent that there are profits to be made. If the only way of making money is to cash in on others' investments, how long until people figure out that their investments aren't paying off and stop investing? At that point you either have to force people to invest/work or come up with a different method.

 

[WhoWee]

I did not intend to promote the concept of a totalitarian communist state. I sincerely believe a free market economy is essential to economic prosperity, but only in the production and supply of useful goods and services. I also accept that the value of any commodity or service, including that of a patent or useful computer service, depends on how much the buyer is prepared to pay. I guess that equates to the real value of any commodity or service. I also see the payment of dividends as a just reward for investors.

However, I do believe that trading in the money supply on the open market creates more problems than it solves. One doesn't need to be a rocket scientist to see the flaws in the world's current banking system, where greed for profit has brought some economies to the point of collapse and caused a major recession. There is nothing wrong with a mixed economy, where private enterprise can flourish and is supported, not milked, by a sane and sensible free banking service funded and managed by the government, like any other government-funded service.

By the same token, it doesn't need me to remind the reader of the infamous Wall Street Crash, when a boom in share prices led to a rush to sell for profit, which in turn led to a wave of panic-selling as share prices plummeted, thereby depriving many viable companies of working capital and triggering their collapse and the ensuing Great Depression of the 30's.

A stable financial system is vital for business to thrive, and money was invented to facilitate the exchange of useful goods and services in complex economies. If we gamble and play with the means of exchange, we clearly risk bringing the house tumbling down!

You've touched upon a few items in your posts that are very important. First (in an earlier exchange w/ Russ) you mentioned "book value". Now in this post you discuss commodity values, patents, money supply, banking systems, and stock markets.

One of the greatest challenges in a world economy is getting everyone to play by the same rules. When state controlled banks (and industries) manipulate currencies or prices - there are consequences.

I'll steer away from the discussion of totalitarian communist states and instead use Japanese policy (before the lost decade) to make an example.

In the 1980's, the Japanese banks allowed real estate to be appraised VERY high for loan values abroad. Accordingly, there was a buying frenzy in the US by Japanese citizens.

A modest house in central Tokyo may have provided enough leverage to purchase a multi-million dollar commercial property in LA, Houston, or Honolulu. Unfortunately, for them, the US market responds with upward price adjustments when buyers compete. The real estate boom was not based on (US) value or the ability of the properties to meet debt service requirements.

In addition to over-building, the price increases forced rents to escalate and led to a large number of vacancies. It took a few years, but prices dropped and investments were lost as loans went into default.

The intent of the Japanese banks was not to create a real estate bubble in the US - it was an unintended consequence that caused boom/busts in both countries.

Btw - It could be argued the Japanese Government liked the idea of buying Hawaii and the West Coast - that's another thread perhaps?

 

[BilPrestonEsq]

Banks you know are allowed by law to loan 9/10ths of there reserves if I remember correctly. Thats why starting a 'bank run' is illegal because if everyone took there money out of the bank it would all become worthless, we would realize that its all an illusion. How about we take the money we want to put in the bank and buy cds that way they can loan out the money for people to build or whatever. That would be the honest way of banking. Theres no such thing as free banking or free anything, members of the physics forum should know that :)Inflation is a *****. Why would I save my money when in 25 years it will be worth half as much? I would be better off buying gold or something of real value. Just my two cents on the banking sytem.

 

[brainstorm]

Banks you know are allowed by law to loan 9/10ths of there reserves if I remember correctly. Thats why starting a 'bank run' is illegal because if everyone took there money out of the bank it would all become worthless, we would realize that its all an illusion. How about we take the money we want to put in the bank and buy cds that way they can loan out the money for people to build or whatever. That would be the honest way of banking. Theres no such thing as free banking or free anything, members of the physics forum should know that :)Inflation is a *****. Why would I save my money when in 25 years it will be worth half as much? I would be better off buying gold or something of real value. Just my two cents on the banking sytem.

Inflation is the result of a "hot" economy, while deflation comes from a "cooling" economy. Investment results in spending to the extent that money invested get paid out for labor and materials used in production processes. As the money is spent, it creates revenues and income. It is this enrichment cycle of spending and receiving money that pushes resource-utilization, including that of human capital (i.e. labor time) to its limits. As these limits are neared, scarcity appears on the horizon and this scarcity causes suppliers/producers to raise their costs in order to maximize revenue per unit sold. Just think of a busy person, swamped with orders for whatever they produce with their labor. Rather than continuing to lower the asking price for their labor to solicit more work, they raise it until their work orders begin decreasing to levels below their desired workload. If their work orders are decreasing, they will do the reverse and lower their price until they start getting orders again.

Saving, to the extent that it prevents spending has a "cooling" (i.e. deflationary or anti-inflationary) effect on economies. When saved money is spent or invested and thereby spent, it has a stoking effect on the economy. Obviously the stoking effect varies according to how the money is spent, what is the produced, and inflation is most likely when the products of investment/spending are less efficient, because the net effect is no change or net loss of productivity and use-value of goods and services.

When investment/spending is productive, the amount of value produced per unit resource-utilization goes up and this translates into a higher ratio of value to spending, which is deflation. When the ratio of spending to value-attained goes up, this is inflation. So saving money promotes deflation (or resists inflation) while spending promotes inflation. If many people would ask "what's the point of saving when my money's not going to be worth as much in the future?" they could give up on saving, and this would contribute to inflation.

If, on the other hand, people gain the resolve to increase their productivity, save, and discipline their spending, deflationary pressure is the result, which is the same as the value of money increasing. The problem with this is that there is resistance to maintaining or increasing productivity while revenues/income is decreasing. People/firms think, "if I am getting less money, I'm not going to work/produce as much," and this contributes to a decrease in value per unit spending in the economy, which causes inflationary pressure.

The real interesting part is not so much analyzing what causes inflation/deflation and GDP growth. What's really interesting is analyzing what constitutes value and how value can be increased while expenditures and costs are reduced. Presumably, an economy that evolves in terms of efficiency and substitutes that render more value with less expenditures (money, resources, and energy) would be more productive and beneficial to all, as long as the deflation and savings didn't reach the point of excluding people from access to the means of maintaining their health and basic necessities (i.e. a certain level of basic welfare). Once that point of exclusion is reached, human capital is being lost through deterioration.

 

[BilPrestonEsq]

What I am saying is that if the dollar is going to keep being devalued by our current monetary system why not invest in something more stable like precious metals, instead of putting the money in a savings account. I am not saying anyone should be irresponsible and
not save. I am just saying don't put it in a savings account. It has been proven by history that if you leave your money in savings for say 50 years it is going to depreciate. This is an undeniable FACT. I am also not going to do subsribe to a monetary policy that's going to give me 'the best way out' in a completely backwards system.

 

[brainstorm]

What I am saying is that if the dollar is going to keep being devalued by our current monetary system why not invest in something more stable like precious metals, instead of putting the money in a savings account. I am not saying anyone should be irresponsible and
not save. I am just saying don't put it in a savings account. It has been proven by history that if you leave your money in savings for 50 years it is going to depreciate. This is an undeniable FACT. I am also not going to do subsribe to a monetary policy that's going to give me 'the best way out' in a completely backwards system.

What difference does it make whether the money is saved in deposits or precious metals? Either way, people (try to) manipulate each other into cashing in and spending their savings. The value of precious metals and other commodities depreciates when a lot of selling takes place, the same as with savings-certificates.

 

[BilPrestonEsq]

What I am saying is that if the rate of inflation continues as it has and you have $10,000 that you plan on saving for say 50 years you would be better off buying something that has remained valuable over hundreds or thousands of years even, like gold. I just want to add that inflation HAS to continue. The 'boom' happens when more currency is introduced into the economy and the 'bust' happens when it's true value is realized. Then the cycle repeats, and if it doesn't, if the economy isn't bailed out by the fed then no one has any money because it has been devalued so much by the 'boom'. We keep trying to patch up the problem all the while making some very rich. Considering when the money is first printed out, whoever or whatever entity has incredible purchasing power because everything is 'on sale'.

 

[russ_watters]

What I am saying is that if the dollar is going to keep being devalued by our current monetary system why not invest in something more stable like precious metals...

So you think precious metals are stable? http://goldprice.org/inflation-adjusted-gold-price.html

1. Not true - precious metals are subject to inflation and speculation too. As the linked graph shows, they are occasionally subject to wide swings. "More stable" or not, they are still subject to significant instability.
2. Stability is not desirable for investing, it is desirable for saving. Growth is desirable (is the whole point of) investing.

instead of putting the money in a savings account. I am not saying anyone should be irresponsible and
not save. I am just saying don't put it in a savings account. It has been proven by history that if you leave your money in savings for say 50 years it is going to depreciate. This is an undeniable FACT. I am also not going to do subsribe to a monetary policy that's going to give me 'the best way out' in a completely backwards system.

Well sure, but I doubt anyone considers money in a savings account to be an investment!

 

[BilPrestonEsq]

Well sure, but I doubt anyone considers money in a savings account to be an investment!

Well I never said anything about investing. What I said was, if I left money in savings for 50 years it would be worth half as much when I took it out because of inflation. I shouldn't have to invest in anything. No one should have to invest in order to save. Investing has risks, risk is a choice. I used gold as an alternative to just leaving my money in savings knowing it's going to depreciate in value. I don't know which way gold is going to go. A huge goldmine could be discovered tommorow depreciating it's value. Atleast with gold I have a fighting chance.

 

[BilPrestonEsq]

So you think precious metals are stable? http://goldprice.org/inflation-adjusted-gold-price.html

Yea that definately doesn't look to stable. This is interesting:http://www.onlygold.com/TutorialPages/prices200yrsfs.htm"

What happened?

 

[WhoWee]

There are a number of calculators available to test results.
http://apps.finra.org/Calcs/1/Savings

 

[brainstorm]

Well I never said anything about investing. What I said was, if I left money in savings for 50 years it would be worth half as much when I took it out because of inflation. I shouldn't have to invest in anything. No one should have to invest in order to save. Investing has risks, risk is a choice. I used gold as an alternative to just leaving my money in savings knowing it's going to depreciate in value. I don't know which way gold is going to go. A huge goldmine could be discovered tommorow depreciating it's value. Atleast with gold I have a fighting chance.

What I am saying is that if the rate of inflation continues as it has and you have $10,000 that you plan on saving for say 50 years you would be better off buying something that has remained valuable over hundreds or thousands of years even, like gold. I just want to add that inflation HAS to continue. The 'boom' happens when more currency is introduced into the economy and the 'bust' happens when it's true value is realized. Then the cycle repeats, and if it doesn't, if the economy isn't bailed out by the fed then no one has any money because it has been devalued so much by the 'boom'. We keep trying to patch up the problem all the while making some very rich. Considering when the money is first printed out, whoever or whatever entity has incredible purchasing power because everything is 'on sale'.

These posts sound like marketing for gold at a time when gold prices are relatively high. If people read these posts and bought into your idea (that's punny, isn't it?), the demand curve for gold would shift up, wouldn't it? The fact is that gold is no more "solid" an investment as real estate was thought to be before the crash. Everything that is viewed as a money-producing investment is subject to boom/bust cycles of speculation. Gold used to trade for @$400/ounce as I recall. What prevents it from depreciating to that value again?

The invisible hand causes all prices to fluctuate in an attempt to motivate people to greater economic rationality. When something else becomes scarcer than gold (relative to demand), the price of that good/service will surpass gold and investors will sell gold to buy the better investment. Until then, you may be right that gold holds value better than anything else, including savings-bonds/deposits.

 

[WhoWee]

These posts sound like marketing for gold at a time when gold prices are relatively high. If people read these posts and bought into your idea (that's punny, isn't it?), the demand curve for gold would shift up, wouldn't it? The fact is that gold is no more "solid" an investment as real estate was thought to be before the crash. Everything that is viewed as a money-producing investment is subject to boom/bust cycles of speculation. Gold used to trade for @$400/ounce as I recall. What prevents it from depreciating to that value again?

The invisible hand causes all prices to fluctuate in an attempt to motivate people to greater economic rationality. When something else becomes scarcer than gold (relative to demand), the price of that good/service will surpass gold and investors will sell gold to buy the better investment. Until then, you may be right that gold holds value better than anything else, including savings-bonds/deposits.

Yes, but you can melt your gold down and mold it into a variety of objects. You can even wear it. Look at all the money you can save on jewelry and ornaments.

 

[brainstorm]

Yes, but you can melt your gold down and mold it into a variety of objects. You can even wear it. Look at all the money you can save on jewelry and ornaments.

But if the price goes down, you could lose a significant percentage of your savings.

 

[russ_watters]

Well I never said anything about investing. What I said was, if I left money in savings for 50 years it would be worth half as much when I took it out because of inflation.

Well no, you said:

What I am saying is that if the dollar is going to keep being devalued by our current monetary system why not invest in something more stable like precious metals...

If you meant "save", then you misspoke, but fine, now I understand what you meant.

I shouldn't have to invest in anything. No one should have to invest in order to save.

It's a free country - no one "has to" do anything with their money. You can bury it in the backyard if you want! What the right course of action is depends on your needs/wants. For the vast majority of people, the primary goal for their largest chunk of cash is long-term saving for retirement and the best strategy to maximize return while minimizing risk is through investing most of it in the stock market.

Investing has risks, risk is a choice.

Everything you do in life has pros and cons, risks and rewards. Everything is a choice. Savings has risk - the risk, obviously, is loss of value due to inflation.

I used gold as an alternative to just leaving my money in savings knowing it's going to depreciate in value. I don't know which way gold is going to go. A huge goldmine could be discovered tommorow depreciating it's value. Atleast with gold I have a fighting chance.

Well instead of a fighting chance, how about a guaranteed return like a government bond or CD? The only way for them to lose money is with a collapse of the US government - and if that happens, the value of your bonds will be the least of your worries! If you're that risk averse, that's the only way to go.

 

[russ_watters]

So you think precious metals are stable? http://goldprice.org/inflation-adjusted-gold-price.html

Yea that definately doesn't look to stable. This is interesting:http://www.onlygold.com/TutorialPages/prices200yrsfs.htm"

What happened?

Your link doesn't have the numbers adjusted for inflation, for starters.

 

[BilPrestonEsq]

Your link doesn't have the numbers adjusted for inflation, for starters.

I was agreeing with you. The graph you posted only goes back to the 70's. I posted that site because I thought it was interesting that the price remained stable until 1932. So what happened between 1792 and 1932. What made the price unstable after 1932?

 

[brainstorm]

Everything is a choice. Savings has risk - the risk, obviously, is loss of value due to inflation.

Savings is always beneficial because saving is fiscal discipline. As you adjust to lower levels of spending, you become better insulated against income loss. Saving is therefore an investment in withstanding income loss. Likewise, if your income goes up the increase is that much more of a premium if your fixed costs have decreased. I.e. income changes are relative to one's cost of living. If one's cost of living has been reduced, income increases are proportionately greater. If they decrease, you're insulated against the loss by lower costs/debts/bills.