Economics majors - please help!

[rush4hire]

I really have no concept of economics. If someone does, then please help me to understand these things. If you can help me and I have a breakthrough, I will be forever in your debt.

I will create a scenario, to simplify things as much as possible:

Let's go back to the Tower of Babel. Imagine a family moves off to settle their part of the world. They increase in number and begin to function as a community where goods and services are specialized.

They all get land, of course. Some farm and produce grains and other things.

Some raise various livestock.

Some fish.

Some make clothes.

And so on..

So they will trade things. Chickens for clothes, grains for fish, and so on.

So some guys find some minerals and begin to mine iron, brass, sliver, gold, etc. So let's say one guy has gold. The others say "Oooohhh.. prettyyyy .. gold..." and now he's set. He can keep trading that gold chickens and clothes and stuff.

Eventually it becomes regulated and they have gold and silver coins.

Even if you melt down the gold and silver, it has value, even as these other goods and services have. It takes alot of work to get these precious metals as much as it takes work to provide the other goods.

What eludes me is this:

How does the gold and silver eventually turn into worthless paper?

And how does that worthless paper become precious?

And how does that precious paper become worthless again?

[Bravus]

Not an economics major by any means, just an interested amateur, but I'll give it a go.

What makes a gold coin have a certain specific value? Say $5? It's not the value of the gold that makes it up: the face value of coins was always more than the value of the metal they contained, otherwise people would melt them down and sell the metal. So a $5 gold coin might have contained $2 worth of gold.

What made it worth $5 was an agreement among people that it was worth $5 - that they were willing to trade it for 5 silver dollars, or for $5 worth of goods and services. The value of the coin was established by a social contract.

Now people presumably also used paper to write IOUs (I owe you) - notes that promised to pay the bearer a certain amount of money. If the IOU was from an honest and solvent (i.e. having enough money to cover it) person, it was as good as cash or gold in terms of its value. People also wrote personal cheques.

Someone realised that paper money, backed by the (presumably) honest and solvent government, served to allow people to carry out the social contract of exchanging money for goods and services just as well as metal coins did. True, paper money has no intrinsic value, whereas coins have some (though less than their face value), so that is a difference between them. But paper money is more convenient to lug around, and it frees up a whole lot of gold and silver to occupy their very useful roles in industry.

Now paper money remains worth its value as long as the government remains honest and solvent. If there's any doubt about that, then you often see a 'flight to gold', where people buy gold as a hedge. The recent spike above $1000 an ounce for gold (it's dropped back a bit since) was due to market uncertainty and turmoil.

But basically, if people are worried about the solvency of the government, paper money becomes worth less. It needs more of it to buy the same amount of goods and services. That's called inflation.

[Bravus]

In Zimbabwe right now we're seeing hyperinflation, because the Mugabe government is a mess. Currently the exchange rate is one US dollar buys just over $58 Zimbabwe. But that's only because on August 1 this year (5 weeks or so ago) the Zimbabwe government revaluated the currency so that 10 billion old Zimbabwe dollars become one new Zimbabwe dollar.

[rush4hire]

Thanks Bravus.

Back to our hypothetical village. So the people get tired of lugging around gold and silver, so they get together and decide to print paper instead. What do they do? Print a bunch of paper and they all agree the paper has value? And then just distribute it amongst themselves like in Monopoly? And then whoever has the most in the end of the game wins?

Or does some guy print up some money and start convincing people it's worth alot, like some con-artist and start buying up stuff with it?

At what point does the cash get value?

So cash is like a bunch of IOUs?

[rush4hire]

What made it worth $5 was an agreement among people that it was worth $5 - that they were willing to trade it for 5 silver dollars, or for $5 worth of goods and services.

Ok, let's just go from metals to paper. To my understanding, the minted coins would have to start out the same value as the metal. The only reason they are in coin form is so they all weigh the same. Of course there would be different weights of coins. Also the mint is trusted that the gold is of a certain grade, which if it where of a high grade, would make it slightly more valuable than any other gold, which you would have to take the trouble and test for quality, and the weight issue is a hassle.

So you could take the metals that you got from the mine, or by bartering, or trading abroad, and take it to the mint and they will purify it and make you some coins so you have a better time trading.

That would be the most honest mint. I guess it's downhill from here...

Now the big trust issue comes in. The guy I formerly called the "con-artist". Well let's assume that for now that he actually has a reputation for trust that he won't compromise for his life. Let's call him Mr. Trust.

This guy builds a print shop and finds a way to print money so no one can counterfeit it. He offers to buy everyone's gold and silver with these bills. His promise is that any time they want to trade back, they can, for exactly the same weight and purity of metals they traded in for. The bills and metals will have the exact same value in trade, but the bills are much more convenient, plus it's not a universal currency, like gold. The bills are only honored in our community. If the enemy sees us with all this gold, they will come and kill us for it, and go take it anywhere in the world and spend it. But they couldn't do that with our paper money. It would be worthless elsewhere.

He has a point, some say. Others say he's just trying to steal all their gold. They can't decide. Then a group of spies come and they get a scare. What if the spies see all this gold and come back with force and kill us all for our gold? But if we trade with Mr. Trust, then he can keep it safe for us, and we can use his paper to trade with. Then if the spies ask, we'll say we got robbed already and they will feel pity on us seeing we are trading with worthless paper.

And we can always get our gold back for exactly how much currency he gave us for it. We can trust him. He's Mr. Trust, after all!

And that, boys and girls, is why you have great heaps of gold bars in your federal reserve banks.

It seems like we are starting to get somewhere. If you see any glitches in this story, don't hesitate to say something.

[fccool]

Actually, the one of the largest misconceptions is that governments around the world print money. In most western countries today this is not the case for 90% of the money in circulation.

The money comes into existence every time it is borrowed from a bank. More than 90% of money in circulation is NOT paper. It is checking money in the accounts of banks.

Basically the money creation by the banks is possible due to the fractional reserve banking. If you go to the bank and you deposit $1000 into a checking account, then bank can legally loan someone $900 of that $1000. They tell you that the 1000 is available at your disposal, and it is... as long as other people don't rush in and claim their deposits. So you have a situation where bank has its cake and eats it too. It's an accounting trick. They loan people the money, and count IOU as an asset. And they can shuffle around the %10 of money they have to satisfy the customer checking needs. If they are short, they can borrow from the Federal Reserve banks to cover that need. If people panic and withdraw their money, then bank goes under.

The truth of the matter is that much of the money in the economy exists as a long term loans to someone. Another sad truth, It's not paper... it's either a digits in the bank, or a check on a way to become digits. So essentially, it is IOUs circulating until these are paid off.

With that being said, the way money becomes worthless has only partly to do with amount of money "printed". There's a little economic principles of supply and demand. When something is in abundance it becomes less wanted, and thus it worth less. If it is scarce, then it worth more... if it is in demand.

With that in mind, the supply of the product have to be backed up by an equal supply in money for prices to remain stable. If the money supply exceeds the supply of products, then prices go up. This is THE PRIMARY REASON behind the devaluation of the dollar. Sure, there are some speculation that is involved which can temporary bump it up or down. Now, this scenario is true on the microeconomic scale... meaning no other countries involved.

Things become more complex when we get into economies and money of countries. Yet, these work very similar. The obvious unjust thing that you may observe, is the fact that a western country can dominate the "third world country" solely based on the perceived value of the currency, and the amount of loans available to its residents. Thus, in effect, the western countries can conjure up their currency out of nowhere and buy real products, with money sitting as an IOU in accounts of those who buy these products. That's why we see the shift from US being an industrial economy in 50s, to being a service and financial economy now... as services constitute 85% of US GDP.

With all above in mind. Cash is a product, and it is worth as much as you think it does. If you think about some of the collectors, they pay millions for pieces of cloth with some paint on it. The perceived need and want is what makes certain things "valuable".

Sorry for the rapid fire answers, but I'll get back to you about these.

[rush4hire]

Thank you fccool. That was most enlightening. I'll have to read it again after some sleep.

Maybe I'll write a book some day: "How I Tricked the World Out of a Free Education"

Back to my Sim City. I started it. I better finish it. Feel free to chip in, if you want:

Chapter 3: Credit.

So the people are very confident in this new system. They trade their gold for cash and cash for gold. But wait a minute? How does he make his money. Call a meeting... Now the the people are suspicious. Is Mr. Trust printing off money to spend for himself? He can't do that. Then what if everyone wants their gold back, and there's too much cash? The last ones to buy back their gold won't find any there!

So Mr. Trust says: "I have not printed any extra cash. But I assumed you would all eventually want to borrow some cash or gold, and then pay it off over time. For the loan, you will pay interest according to how much time you will need the money. That's how I planned to make money. I'm Mr. Trust. If you can't trust me, who can you trust?"

Wow. The prospect of an organized system of borrowing money. You can spend money you don't have yet! They apologize to Mr. Trust and go home with new dreams of what they might buy with money they don't have. The concept of credit!

So a farmer goes to get a loan. He agrees to put up the land that he has for money to buy another piece of land. Now, if he can't pay, Mr. Trust will take the land and sell it to get the money back that he loaned, so there will be no money missing. He borrows $10,000 and agrees to pay $300 / month for 4 years. By that time, he will have paid back $14,400. Mr. Trust puts $10,000 back in the bank and keeps $4,400 for himself.

More and more people do this and thrive and prosper in business, and Mr. Trust continues growing richer and richer, but so do the people...

Now up to this point Mr. Trust has only printed cash in exchange for gold. Every bill is covered with gold. The people will still be able to trade back every bit of currency in print for every bit of gold in the bank, if they should ever decide to. That was part of the deal.

So how is the money increasing? The gold is increasing through foreign trade. Gold is the universal currency.

(to be continued...)

[fccool]

Many people make gold an issue. The reality is that there is not enough gold supplies in the world to back the needed money supply. You need some kind of a system of exchange.... BUT IT SHOULD NOT BE A PRIVATE MONOPOLY... as it is now. Governments should issue the money and spend it as the economy is in need of money, and they should decrease(destroy) the supply of money through taxation if there's too much money circulating. That way, the government would act on behalf of the people, instead of mindlessly borrowing the money from the banks and then we the people have to pay it back with interest... and interest on 10 trillion dollars is a lot of money a year!

Same goes for the private banks. These should serve a banks (storages) of money, and not as "virtual printing presses". They have to land out the money they have, and the money they claim to have. Once that in check you can have some kind of hope for prosperity, instead of gradual polarization of wealth as people with money get more money, and people with no money get to pay interest until they die.

[rush4hire]

Interesting. In Wikipedia I find this:

http://en.Wikipedia.org/wiki/Inflation

Inflation originally referred to the debasement of the currency, where gold coins were collected by the government (e.g. the king or the ruler of the region), melted down, mixed with other metals (e.g. silver, copper or lead) and reissued at the same nominal value. By mixing gold with other metals, the government could increase the total number of coins issued using the same amount of gold, and thus gained a profit known as seigniorage.

That's pretty crooked. That's just stealing. It's like a government flooding it's own economy with counterfeit bills. They provide no good or service in exchange for the money, which would make the money valuable. They could create this money, then invest it to buy up something that did have value, before the price went up because of the inflation that they created!

Unbelievable. And I'm sure the minimum wage wouldn't even go up at all.

That's a crooked government.

Well, we haven't gotten that far in our scenario. In fact I see no need to create money with nothing to back it up with. If money goes into short supply, then it's worth more. Prices go down so things cost pennies instead of dollars. It would seem...

[rush4hire]

Well I have to admit, I'm stuck on this microcosm here. Also I have alot of work I need to get to, so my attention is very much divided right now.

We could say gold started becoming scarce. There's only so much of it in the region. So it becomes more precious. Then the legal tenders would become more precious too. The bank would burn some of their cash and replace it with new units of currency in much smaller denominations. Because if money is in short supply, then then everything else will be cheaper. Pennies instead of dollars, like I said.

The bank would have long since grew into a great big organization and branched out, introducing it's currency idea to other tribes and villages. What difference does this make? I don't know.

But the original parties involved will have the most valuable money and the most holdings. They even form their own materialistic religion. Because they have so much, they figure they are smarter than everyone else. They call themselves "The Enlightened Ones", or the Illuminati. WhooOOoo.

w/e..

Anyway, they figured it's a pity that the gold is not doing anything. There must be a way to put it to use without messing up their economy. Everyone sees gold as valuable, as if that's what God had in mind when He made gold. The word "gold" is found 417 times in the Bible, from Gen 2:11 and last in Rev 21:21

Of course the people can always buy gold and make jewelry out of it or go trade abroad, or whatever.

But still they hate to have it just sit there.

Big blank ________________________

I'm stuck.. And also quite distracted by pressing business.

We might factor in the future generations of Trusts. Eventually, they might start becoming less honest, knowing the nature of man. Of course, there are many things to consider.

But never-mind the mess we have now. What's the origin of inflation? Is it as simple as the corrupt king that just prints more money out of the thin air?

Let's consider this too:

In a time of crisis, the governors consult a universal church entity. We have seen this happen. When people get really scared, they try to turn to God, or to what people recognize as representing God on earth. I could cite scores of examples, but I won't at this time.

The advice of the church is a Sunday law. To make sure people everywhere take the day off on Sunday. This is promised to appease the wrath of God against the nation. It doesn't work, so they blame Sabbath keepers, because they are opposed to Sunday. They are made out by the media to be an abomination, like the Davidians, (whom I believe where not really adulterers and child molesters with a plan to shoot up the town of Waco).

So that appeals to those who are superstitious. But the more practical minded people know they can't oppose the Sunday law, but to make the economy strong, people need to be working six days a week, because before, business continued 7 days a week. There's no room for wasted days anymore.

[color:#BF0000]Exo. 5:4 And the king of Egypt said unto them, Wherefore do ye, Moses and Aaron, let the people from their works? get you unto your burdens.

5:5 And Pharaoh said, Behold, the people of the land now [are] many, and ye make them rest from their burdens.

5:17 But he said, Ye are idle, ye are idle: therefore ye say, Let us go and do sacrifice to the LORD.

What matters is productivity. Those who insist on their right to keep the Sabbath will influence others and everyone will insist on 2 days off. In the past, that's not so bad, but now we have to work around Sunday, and we have an economic crisis.

Just a possible scenario.

[rush4hire]

Does everyone agree with my "Sunday Law" scenario? Does anyone have a better scenario? Should I make a new thread? I want this thing to be real. I believe it's going to happen, but I want to know exactly how. I want to scare people. Seriously. I want to put the scoffers to silence. Am I the only one?

[color:#BF0000]Habakkuk 2:2 ..Write the vision, and make [it] plain upon tables, that he may run that readeth it.

[cricket]

All I know is that in heaven the streets are made of gold...so...in heaven gold is nothing more than concrete.

Sundays laws? Let 'em come! Scared? Nah. It's only one step closer to the day that the gold will be pavement beneath our feet.

[nuff sed]

If the streets are made of gold where do the gigantic pearls come from to make up the gates???????????............ or do both just illustrate the beauty of the above. Perhaps the writers were illustrating it depicting the most valuable thing they were aware of.

[rush4hire]

Sundays laws? Let 'em come! Scared? Nah. It's only one step closer to the day that the gold will be pavement beneath our feet.

Don't you understand about making the vision plain? It's not about you being scared. It's about getting this message to the world so people can see it clearly. They need to be to the point where they have no excuse. That's my focus now. Well I'll just make a new topic. I might not get time for another week or two, though.

[cricket]

Don't you understand about making the vision plain?

[cricket]

If the streets are made of gold where do the gigantic pearls come from to make up the gates???????????............ or do both just illustrate the beauty of the above. Perhaps the writers were illustrating it depicting the most valuable thing they were aware of.

You make a valid, valid point, Gladusee. I can't help but think this morning though...that if the streets are made of gold (even figuratively), what value and worth God really holds for us in heaven. What splendor and glory He is where the value of gold is reduced to "concrete" by comparison to the value of He in our presence!