The value of money

[Koumei]

Okay, I was being a smartass and telling my sister "We want real dragons, not those cheap Chinese knock-offs. You get what you pay for, and the British pound shits all over the Chinese yuan."

This then branched off into a discussion on how the Chinese government is intentionally keeping the value of the yuan low, and how that generally helps a government insofar as their debt is concerned, and hurts the people.

She then asked, out of mild curiosity, how the value of any given currency is determined. I have no fucking clue.

Could someone shed some light on this, or even tell me the right words I should be typing into Google? There are a lot of people here that understand economics and politics better than me. There are some really smart/well-educated people here. With any luck, I could get some kind of answer.

Thanks!

[Username17]

If you check on line you'll probably get some crap about "market forces" or something. That's crap.

Currency prices are fixed by agreement between the people who have all of it. For much of the 20th century, the Breton Woods agreement fixed most of the world's currencies against each other. Countries which weren't part of that agreement system nevertheless controlled the price of their own currency so long as they controlled the majority of it.

But late in the 20th century, governments lost control of their currency prices. To hear economists talk about it today you'd think it was deliberate and even a good thing. But basically what happened is that a shadowy cabal of currency speculators acquired enough world currency that they could set the global market for any particular currency in defiance of international treaties or the wishes of the governments who originally issued those denominations.

Now for an example of why this is a terrible thing go to Google and type in:

Thai Currency Crisis

Basically, Thailand "decided" to float their currency becuase international bankers had enough outstanding Thai Baht to mean that people who wanted the Baht would buy through them rather than through the Thai government and thus the nation of Thailand was a minority retailer of its own currency. When the government agreed to sell all its Baht at the "going rate" these same financial institutions sold their bahts back and forth for a song so that the "going rate" was close to zero. And then Thailand, which already had a bunch of foreign debt, no longer had enough money in the whole country to cover it all and things imploded.

-Username17

[Koumei]

Thank you. That was not only informative, it also had an interesting story attached.

[Username17]

The moral of the story is that economists are like astologers. They are forced to tell the aristocrats that the omens are good and that their lives will be long and powerful.

In the case of economists it is because it is demonstrable fact that having economists tell people that the economic omens are good actually improves the economy. So basically you can guaranty that if something is within the economy as we currently do things, that economists will tell you that it is good. And if tomorrow we stop doing that for any reason and start doing something else that will be even better.

-Username17

[Lago_AM3P]

--------------------------------------------------------------------------------

The moral of the story is that economists are like astologers. They are forced to tell the aristocrats that the omens are good and that their lives will be long and powerful.

So how do we get out of this pickle? Armed revolt?

[Fwib]

What pickle?

[Koumei]

If I understand it correctly, it means that as long as the economists say money is good, then it is actually good, and that benefits them as well as us.

That's not actually so much of a problem as long as we don't have another Thai Currency Crisis.

[the_taken]

It's not a question of 'if'. To the universe, there is no 'if'. There is only 'when'.

[Username17]

Recall that the Thai Currency Crisis happened because people made it happened. And that those people not only went unpunished, but became even richer doing it.

More recently they pressured for (and got) the subprime loan ball going in the US and made a lot of money off of that as well (in that they created a bunch of unsecured debt and then sold that debt around the world and ran off with a santa sack full of cash).

Large scale investors are incredibly destructive and have an incredible amount of control over our lives. And they essentially answer to noone.

-Username17

[Koumei]

Ah. Hmm, if they're benefiting from it so much, then I see where it is a problem. Perhaps if we take an Imperialistic view of things, we can get the solution: kill them with fire. Possibly missiles, too, to be on the safe side.

Then bomb the planet from orbit just in case.

Okay, I'm beginning to see the flaws. Perhaps there actually needs to be an international (er, multi-national? Non-national?) organisation that identifies those who control too much money, says "fuck you" and seriously just takes vast amounts of that money away and redistributes it into the system. And if they actually do fuck an economy, this special "Not part of any one country and above the law" force shoots them. Or arrests them, or whatever. But no-one is left feeling justice was served unless there's a corpse with a bullet-hole soon after the event.

We could even get ex-Sovjet Commissars in on the job. Wait, how long ago did they stop existing? It's no good if we'd need to dig them out of nursing homes.

[Username17]

What makes you think they stopped existing?

Seriously, the relationship between the current Russian Federation and the Soviet Union is complicated. Vladimir Putin was a KGB hard-ass and basically he still is.

Anyway, the problem here is that neoliberalism doesn't "produce" things, it makes money. It's very extractive, and that causes a lot of problems. And it is the logical extension of capitalism. Capitalism isn't about making wealth, it's about getting wealth. Given sufficient power, the capitalists will always choose to take your dollar rather than make something which is worth a dollar.

The basic contradictions of our system are catching up with us. The wholesale looting of entire countries is merely a side effect. The underlying difficulties are much more complex.

----

A planned economy (like the one the Soviet Uninion mostly had) is limited by planning and compliance, but it actually has functionally limitless demand. Whatever it creates, it can distribute. That's why the Bolsheviks were able to double the life expectency and win the space race in two generations while they were in open armed conflict with 10 of the most powerful nations in human history.

But while the Stalinist totalitarianism did deliver the compliance it was after, the removal of people who didn't agree with the commanders (or at least put forward a very good face of it) also limited the number of potential planners. The Soviet methodology took the life expectency from 30 to 60 in an unprecedented period - but it probably wasn't going to be getting to 90. Maybe ever. Communism can only continue as long as your pool of educated and effective planners keep up with the increasing complexity of the economy.

On the flip side, capitalism is not limited by planning or compliance. You don't need a central plan at all and thinks will continue to advance. But it is limited by "Demand." And that's not "people who need or want stuff" demand, that's economic demand - which means that people want something enough that they are willing to pay for it - which has the additional caveat that they have to be able to pay for it. The limits on capitalism are the amount of spending money that consumers actually have. Any goods and services produced in excess of the consumer spending money cannot be sold and are eventually thrown away.

And while having a capitalist hire people to produce things does increase demand, it does so by less than the demand which will be consumed by selling those items. Definitionally. That's where profit comes from.

So capitalism can only continue so long as either everyone is being paid now for producing things which be sold in the future (and thus presiding over a cycle of unchecked and unplanned growth where an ever increasing backlog of unsold merchandise eventually chokes and destroys manufacturing and ends the economy), or a new revenue source is continually found and used up in order to pay for the objects already produced (like say, destroying the economy of Indonesia).

---

Now the role of the economist is different in the different systems. In Communism the planning is essential, and the economist's job is to keep track of the interplay between every microcosm and the macroeconomic picture. To define how much everything should "cost" and how much everyone should "make" so that whatever it is that you're making can go to the people who need/deserve/want it and the minimum amount of stuff gets thrown away and the minimum amount of shortages occur. In the capitalist economy, the economist's job is basically just to make sure that everyone believes that things will work fine. After all, the more the consumers believe that the economy will continue to grow the more they'll be willing to spend (not save) of their money, and therefore the more "demand" will exist in the system and the longer the economy can continue to grow. If an economist in the capitalist system is respected enough, his predictions are always right.

But in either case, the economist is not actually the root of your problems. Greenspan is an evil fuck, but he didn't actually loot the Savings and Loan. Or the South East Asian Real Estate Bubble, or the DotCom fiasco, or the SubPrime Debt, or the EnRon looting of the public utilities. He existed as a ceremonial high priest whose purpose was to keep people as happy as possible with the way the economy was running while those horrible things were happening.

-Username17

[Fwib]

What about the middle cases, where you have some of one (capitalism or planning) and some of the other?

[Username17]

1198774190[/unixtime]]What about the middle cases, where you have some of one (capitalism or planning) and some of the other?

An excellent question, and one which is especially apt as with only a tiny number of exceptions (North Korea, Afghanistan), every country is some sort of mix betweened Market and Planned.

The answer is that you are then limited both by demand and by planning capabilities. In order to keep the market economy moving the government has to acknowledge some kind of "budget" with incomes and expenses and such. Corporations have to contest themselves against regulation any time they do anything - essentially putting strain on the planning infrastructure of the nation.

There is synergy however. Market Forces essentially create a well of planning to draw upon and government services create an influx of demand that can be exploited (which yes, is the actual word).

---

When you have a mixed economy, you can look at it as a planned economy which then outsources some amount of its planning needs to outsiders (the capitalists) who provide planning services in exchange for taking a portion of the nation's wealth and hiding it in a sock drawer.

You can also look at it as a Market economy where there's one player who has a lot of capital and isn't even trying to "win" the game of capitalism, he's just trying to use his capital to increase demand and keep the game running.

And you actually have to look at in both ways, because if either your planned or market sector collapse, your society grinds to a halt and people start starving (see Chile).

----

Now, the other part is that Capitalism can't "not grow" - if it does it hurts itself and everyone around in spasmic contractions. And when it can't grow through technological innovation or capital investiture, it does always have potential for parasittic growth so long as there is a public sector for it to imperialize and devour.

That was Enron if you'll recall. They didn't actually make anything, they simply purchased the rights to the power that was already coming out of power plants and then turned around and extorted wealth out of people on the threat that they'd stop the flow. And that's not unusual or anything, that's pretty standard and common. And it's not just large private sectors with lots of freedom - recall what happened when merchants in the Ming Dynasty got together enough wealth to buy their children into the government. They shut down all the other merchants by "banning the private sector altogether" (leaving only those merchant guilds first in on the ground floor of the government able to continue business under the auspices of the new "minitsry of trade").

So while a private sector can create a well of planning for a planned economy, recall also that it is by nature rapacious and consumptive. And once it has run out of things to make, it will continue making profits for individuals by taking your society apart board and nail.

-Username17

[JonSetanta]

Why is Frank not a professor? Hm.

[Fwib]

1198780099[/unixtime]]Why is Frank not a professor? Hm.

I think you need the accolades of your peers to be a professor, which may be hard to get if you are continually pointing out how they are wrong.

[edit] Checks wikipedia - ahh, 'professor' means 'university-level-teacher-guy' in the US.

[JonSetanta]

I dunno, Fwib. There are a lot of douchebags in English and art departments.
They hate each other, they hate their students. They probably even hate themselves.
Frank would be mild in comparison to the compulsions and neurosis I've witnessed.

[Shatner]

I find all this very insightful but I have to question the definition and use of “profit” in Frank’s previous post. Here’s my understanding of the intended meaning, illustrated by example:

The hypothetical Freemore Company makes alarm clocks at the cost of $5 per unit (which includes all factors of raw materials, wages, taxes, advertisement costs and so on). They sell these clocks for $10 dollars each so after 100,000 are sold during a fiscal year the Freemore Company now has (a net) $500,000 dollars more than they did before. And some percentage of the money will be reinvested but some percentage of it will go into the pockets of the Freemore Board of Trustees. Or whatever. The money “lost” in the production-reinvesting cycle is profit.

So, why is that a bad thing? Aren’t the Trustees going to spend that money on other things as well (food, luxury items, entertainment, taxes, alimony, etc.)? If so, how is that one of the breaking points of Capitalism? If not, where does the money go?

[Captain_Bleach]

1198747218[/unixtime]]
Large scale investors are incredibly destructive and have an incredible amount of control over our lives. And they essentially answer to noone.

-Username17

Welcome to the unfair world of back-stabbing economic politics. That's why I'm a pirate. Them corporate goons cud be all thievin' and stealin', but they are romaniticized... romanticised... ahh, loved... instead of hated! And ye always here about the pirates, being all pillagin' and lootin'! But if ya own a business and summer home, people don't complain as much, 'cept fer those libertarians and anarchists.

1198780099[/unixtime]]Why is Frank not a professor? Hm.

Because our standards of medical profession is different than the Czech Republic's.

Edit: Stupid triple post!

[Catharz]

1198785300[/unixtime]]
So, why is that a bad thing? Aren’t the Trustees going to spend that money on other things as well (food, luxury items, entertainment, taxes, alimony, etc.)? If so, how is that one of the breaking points of Capitalism? If not, where does the money go?

Theoretically the vast majority of that money goes into bank accounts (and the bank invests some fraction, which is why you get interest) and other investments. Only the fraction which isn't invested by the bank is 'lost'.

[Username17]

1198785300[/unixtime]]I find all this very insightful but I have to question the definition and use of “profit” in Frank’s previous post. Here’s my understanding of the intended meaning, illustrated by example:

The hypothetical Freemore Company makes alarm clocks at the cost of $5 per unit (which includes all factors of raw materials, wages, taxes, advertisement costs and so on). They sell these clocks for $10 dollars each so after 100,000 are sold during a fiscal year the Freemore Company now has (a net) $500,000 dollars more than they did before. And some percentage of the money will be reinvested but some percentage of it will go into the pockets of the Freemore Board of Trustees. Or whatever. The money “lost” in the production-reinvesting cycle is profit.

So, why is that a bad thing? Aren’t the Trustees going to spend that money on other things as well (food, luxury items, entertainment, taxes, alimony, etc.)? If so, how is that one of the breaking points of Capitalism? If not, where does the money go?

In the ideal and entirely theoretical world of economics that you see bandied abot on FOX News, there is nothing about it that is bad. Indeed the Freemore Shareholders will take that money and it too will become Demand. And basically what happens is that Freemore's employees and creditors get half a million dollars (which is all demand), and they shareholders get half a million dollars (which is all demand), and the demand of consumers out in the wilderness was reduced by a million dollars but you created a million dollars of demand doing it so everything is fine.

The problem is that what actually happens is that the Freemore Shareholders take some of that money and spend it (creating more demand) and they take some of that money and transfer it out of the country into increasingly large slush funds which aren't used to purchase goods, services, or capital investments - but are instead used as "power."

So out of your 1 million dollar reduction in demand by paying for the alarm clocks, you create some smaller amount like eight or nine hundred thousand in new demand, and the rest goes off to finance activities like the Thai Currency Crisis.

Also of course, remember that there's a delay involved. What happens is that the Freemore Corporation has a half million dollars and the rest of the consumers have a million dollars. The Freemore Corporation gives their half million dollars to indigent consumers and now there is one point five million dollars in the hands of consumers. The consumers then purchase Freemore's stuff for a million dollars and now Freemore has a million dollars and the consumers have half a million dollars.

There is nothing stopping Freemore from doing this again and then acting like consumers themselves with the other half a million dollars. But until they decide to do that there is only half a million dollars in the consumer pile. And that's what another corporation would see if they contemplated making something themselves. So even if Freemore decided to reinvest and spend all their money, it would still deplete the demand of the economy instantaneously.

-Username17

[Koumei]

I don't entirely understand all of what's being said, and it makes me wonder if I'm just stupid, but I do understand a fair amount, enough to get the basics of what's going on.

At any rate, it does make it hard to work out the ideal model and how to incorporate it into the system and how to make it work. And no matter what, there are going to be things that can make it all collapse, especially if greedy bastards have a say in the matter.

This is where the Commissars and assault rifles come into play, though.

[Surgo]

Who says there's an ideal model?

[SunTzuWarmaster]

First of all, the seas of high finance [Monty Python reference] are actually quite absurd. If you are curious to see a smaller version of the above scenario, look up day-trading and/or futures. Essentially, there are people out there that do the following scenario a few hundred times in a day:

Farmer: I've got a basket of corn for $1
Daytrader: I'll take all of it!
Store: Next year I need some corn
Daytrader: I will sell it to you for $3
Store: Deal
Daytrader: Talk to the farmer.

Frank, good read, the only stipulation that I have is from:
"After all, the more the consumers believe that the economy will continue to grow the more they'll be willing to spend (not save) of their money, and therefore the more "demand" will exist in the system..."

No one even cares what the small-time (anything smaller than publicly traded company) capitalist consumers do. All of their money stays in the economic system provided that they don't bury it in the back yard, which doesn't happen in large enough amounts to care about. Money that they invest is invested, money that they spend is plugged back into the economy (or better, on credit!), money that they 'save for retirement/rainy day/joy of saving' is continually re-invested by the banking system. Considering that much of America's (and other 'First World' countries) monetary supply is now in the form of 'Imperial Credits' (Digital, Visa), provided that you aren't a stripper that gets paid in cash and distrusts financial institutions, your paychecks come in the form of checks which you take to the bank (or skip you entirely with direct deposit).

And yes, everything is good provided that there is economic activity. For example, there was an article in a recent paper that was touting the fall of the American dollar. Yes, your savings is dwindling rapidly, but foreign investments are at an all time high, America can more easily compete in global economic trade in the form of reduced prices on American-made goods, which indicates an increase in the number of jobs, a decrease in the national unemployment rate, etc.

Oh, and Greenspan is a genius. I don't think of him as evil, so much as manipulative.

[Crissa]

Generally as a small investor, you watch for when the 'big money' comes in and out of the markets - there are people with enough money to totally change the price instantly. A small investor wants to bet just slightly off of these waves so that you can ladder your investments.

Otherwise, you're better off with government bonds. If the government falls, the bonds are worthless - but so are your bank accounts and cash, so anything is up in the air then.

Anyhow, 'big money' aims for 'big profit' rather than 'any' profit. Which means that it will pull out of profitable things if something else is possibly more profit. Which doesn't mean that following it is the smart thing - big money loses big money all the time as well as making it.

This is why publicly traded companies dump profitable ventures.

-Crissa

[Surgo]

I've got my own question to go along with this: how did the devaluing of the Thai currency benefit those who did it, exactly?

They obviously hold a ton of Thai currency, so it couldn't be directly beneficial. Maybe I'm not thinking creatively or outside the box enough, but the only way I can see them really benefitting from it is if they transform all their Thai currency into some other form (thus dumping it all on the world market and devaluing it). But they'd have to be able to do that pretty much instantaneously for it to keep its value and for them to profit from that, and that seems...problematic. Is there some other, possibly more indirect, way that they are benefitting from doing this sort of thing?