Friday, March 28, 2014

Money III: Liquidity Trap

If you have been following along with our Money and Money II posts, you know that we have been deconstructing the idea that money is a store of value, at least for any length of time. In fact, we would go so far as to say that if money itself becomes a long-term store of value, then the economy will be bad. One way this can happen is if the economy falls into the "liquidity trap."

The trap arises out of a widespread desire to hold onto one's money rather than spend it or even invest it. The value of money rises over time (that is, there is deflation) and the money in circulation goes down. The money supply may or may not dwindle, depending on whether the cash stuffed under mattresses is counted or not. Either way, however, economic activity goes down, aggregate pay goes down, and unemployment goes up.

The reasons for the desire to hold on to cash--what is, in effect, a decline in confidence--can be many things, but the reasons are related to expectations. If people expect that cash will be hard to get in the future, they will save it now.

Since people generally prefer cash to financial instruments in a liquidity trap, there is an effect on strategies with respect to debt. These strategies differ depending on one's economic strength relative to others. The rich will tend to pay off debts and lend less. (This is where the central bank role in the liquidity trap comes in. The central bank can add reserves to the banking system, but the rich are reluctant to lend and many are reluctant to borrow at all economic levels. The extra liquidity does not really help the economy.)

Some of the poor, being closer to the edge and needing to obtain a minimum amount of cash right now, might try to cut their own costs even more. Also they might try to work extra hours, take lower pay, work multiple jobs, and emulate the rich as well as they can by paying their debts. This is the so-called "race to the bottom," an attempt by workers to compete with one another, follow society's rules, and find out just how little a human being can live on. This is not a road to prosperity, though the rich will speak very well of such people. The rich will honor their determination, honesty, integrity, and dedication to hard work. The rich generally do not praise them for their intelligence, however.

On the other hand, other poor people might throw society's rules out and borrow as much as possible, figuring that it is better to have the money in hand now than to worry about how to pay off debts in the future. Naturally, lenders are not happy with this attitude and approach, so they fight them with as many social weapons as they can, including legal sanctions as far as possible. The rich punish them with poverty (that is, austerity), blame, and by socially marginalizing them. (In today's world, think of the Greeks, how they are treated and how they are spoken about.)

A liquidity trap therefore is generally an advantage for the rich. In particular because the government, which does want its people to be as successful and productive as they can be, cannot pull its people out of the trap using monetary policy and may not be able to use fiscal policy to do the job. (Because of politics and its own financial situation.) A stubborn ongoing liquidity trap is one reason why the Great Recession in the US has had such long-lasting effects.

Under the system, liquidity traps will not happen in the internal markets. That is, millions of people will not lose their jobs, their houses, and much of their savings simply because banks become reluctant to lend. Cash will not be allowed to become the preferred store of value in the internal markets. No one will have to be concerned where the money for their livelihoods--their basic needs--will come from.

Of course, if the rich want to create liquidity traps in their own markets, we would not want to stand in their way. Support

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2014 TheOtherSideOfCapitalism

Sunday, March 23, 2014

Money II: Store of Value

Last week in our Money post we talked about the functional definitions for money. We made the argument that for our purposes, four of the five definitions are related to the value of money over time, barring some quibbling over the definition of money as a unit of account. Therefore it is reasonable to collapse all the definitions related to the future value of money into one: money as a store of value.

That naturally raises the question, is money a good store of value? Or, from a pragmatic viewpoint, does it make sense to save and store money as money for retirement? What are your chances of maintaining the purchasing power of your money that way for thirty or forty years? The answer is: almost zero.

Granted, as Robert Storm Peterson said (and apparently NOT initially Yogi Berra), "It's hard to make predictions--especially about the future." In any given period, money may actually gain purchasing power over time, more than maintaining its "value." However, given that the Fed tries to keep some inflation going all the time (about 2%), after a period of 30-something years, your first year of savings in money will only have half the purchasing power that it did in when it was earned.

Another danger to your pile of savings in the form of money is that there may be periods of enormous currency manipulation between now and the time you retire. In the US, for example, this was done during the Civil War. In the 1930's, the Roosevelt administration passed laws to keep gold out of the hands of US citizens. There is still debate whether the idea worked or not, but the idea was to encourage Americans to stop hoarding and start spending as a way to work their way out of the Great Depression.

Finally, something we mentioned in last week's post, saving money as money for retirement assumes that population demographics or other physical phenomena will not significantly change the prices in certain vital markets. For example, the price of food can become exorbitant if a true famine arises. We also pointed out that if the retiring Baby Boomer health care workers are not replaced, and the numbers of them not actually increased, then health care for retirees could also become exorbitantly expensive. Your cash savings may not be enough.

Therefore almost no one saves a significant amount of cash over long periods of time. Instead we invest. We buy things that we think have a better chance than cash does of maintaining value for our retirements. In a sense, therefore, the idea of money as a store of value is false. In many respects, money is just a medium of exchange that we use to purchase things that we prefer to cash over the long term. "Saving" is not about saving money for any length of time. "Saving" is about buying stores of value with our excess cash.

More next week.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2014 TheOtherSideOfCapitalism

Sunday, March 16, 2014


Thomas H. Greco Jr is another author who writes about multiple currencies, alternative currencies, and complementary currencies.  (We noted Bernard Lietaer's work last week.)  See Greco's 2009 book The End of Money and the Future of Civilization as well as his 2001 book Money: Understanding and Creating Alternatives to Legal Tender (with Karen Kerney and Vicki Robin). If you want a good explanation of "What is money?" read his Chapter 4 from the 2001 book Money for an explanation.  The title of Chapter 4 is in fact, What is Money?

Today we are particularly interested in the functions of money that Greco lists in his Chapter 4. As he says, these make up the functional definition of money. Here they are.  Money is:

  1. a medium of exchange,
  2. a standard of value,
  3. a unit of account, 
  4. a store of value, and
  5. a standard of deferred payment.

Our readers could already guess that we think of currencies and the money representations of those currencies more in terms of the medium of exchange function than the other functions, especially if you have read our post Theory of Wealth.  However, let us think about some of the other functions here. Note that the wikipedia article on money lists "standard of value" and "standard of deferred payment" as being the same function.  "Standard of deferred payment" is further defined as the unit in which debts are denominated. This then bleeds over into the "unit of account" function.

We think the "standard of value/standard of deferred payment" function also bleeds over into the "store of value" function. Most money is designed to have value in the future as well as in the present. This property is inherent in a standard as well. The point of a standard is to maintain some characteristic or quality over time. It would be absurd to call something a standard if it changed frequently. Therefore if money is a "store of value" over time, then it can also serve as a "standard of value/standard of deferred payment" as well.

If money were not relatively good as a "standard of value", then the comparison of corporate performance from quarter to quarter would be quite difficult. What would the comparison of quarter to quarter results mean if the accounting unit for this quarter was significantly different from the one for last quarter?

The trouble with believing that money is a standard of value and store of value is that it has not really worked very well in times of technological advances, population changes, national emergencies, and etc. It may work pretty well from quarter to quarter, but what about longer periods of time?  For example and in particular, what does it mean to save money for retirement? If money were really a store of value over longer time periods, then it would be enough just to stuff cash in a mattress and keep it there until it was needed. That may have worked well in certain periods of history, but no one tries to do that today.

The problem with saving cash for retirement is inflation. Inflation means that it takes more cash in the future to pay for things than it does now. This happens even in ordinary conditions. Thus people today do not save for retirement by hoarding cash. Instead they buy investments that are expected to grow or otherwise mitigate the effects of inflation. That way, when they need cash to pay their bills, they can convert their investments to enough cash to accomplish that. So much for the idea of cash as a store of value for the long term.

Then there is inflation that occurs in extraordinary conditions, such as in time of war. We might have invested well enough to protect our retirements funds from ordinary inflation, but the requirements of war might make our calculations useless. Even investments might not be good enough.

Finally, there are population demographics. Health care costs are inflating at, say, 4 to 6 percent per year already, far faster than the 2 percent or so for the wider economy. That would be hard enough to save for, but consider also that the doctors in the Baby Boom generation are retiring in increasing numbers. If the supply of health care professionals is inevitably going to decline, then there will just not be enough of them. Even if we have invested well, we may be in an era of declining health care services that no reasonable amounts of retirement money can overcome.

We have run out of time today, so we must leave you with a teaser. Keep the weaknesses of money as a store of value in mind, and check back with us later.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2014 TheOtherSideOfCapitalism

Sunday, March 9, 2014

Cooperative Currencies

Of course is not the only proponent of multiple currencies. Bernard Lietaer, Belgian civil engineer, economist, author, professor, and former hedge fund manager, has been writing about multiple cooperative currencies for over ten years. See his and Jacqui Dunne's 2013 book Rethinking Money: How New Currencies Turn Scarcity into Prosperity (BK Currents), for example. In it he lists many existing cooperative currencies and tells the stories of a select few. The major use of cooperative currencies seems to be to provide a medium of exchange when it is difficult to obtain ordinary currencies. That is, in economic downturns.

Lietaer's success stories do not surprise us. They are what we would expect since we would advise similar measures as those taken in the stories.

Similar measures, but not the same. In particular, we do not see in his analysis a need to firewall the rich away from the poor using exclusive currencies. The need appears to be present in several of his success stories, however, because several successful cooperative currencies were terminated by legal action to enforce the central bank's monopoly on currencies. There lies one weakness of cooperative currencies. It is relatively easy for the rich to outlaw them. Alternatively, the rich could simply buy them and manipulate them.

Thus for all the effort and thought that Mr Lietaer and his associates are putting into cooperative currencies, we doubt it will have any lasting effect. Exclusivity is also required in our currencies.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2014 TheOtherSideOfCapitalism

Saturday, March 1, 2014

Monkey Trials

Science threatens religion not so much because it disproves religious belief, but because the output of the scientific method tends to bring scientists to consensus. For example, Satyendra Nath Bose and Albert Einstein collaborated on quantum statistics in the 1920's despite the fact that they were from very different cultures. They produced what is now called "Bose-Einstein statistics." The scientific method defines a way for thinkers to agree with one another no matter what their backgrounds. Scientific thinking converges. For example, despite a temporary defeat, the court of reality ultimately overturned the human court's decision in the original "Scopes Monkey Trial."

The output of religious thinking, on the other hand, seems to affect religious thinkers in the opposite way. Religious thinkers seem to look for ways to disagree with one another. As a result, the world is filled with different religions, denominations, sects, and splinter groups. One would think that if religious belief had any connection with an underlying reality, then the trend of religious thought would converge rather than diverge.

We bring this up in order to highlight the divergent nature of economic thinking. One result of the Great Recession was to paste a big "Epic Failure" sign on the backs of all our economists. After decades of study and effort, meetings and arguments, published reports and reviewed papers, none of them were able to predict a major, world-shaking economic event like the Great Recession in such a way as to convince most other economists of the danger.

Like religious thinkers, current economists cannot even agree on a way to agree with one another. The result is that we can find reputable economists who will take opposite sides on most any question. This allows politicians to pick the economic policies they want and then find economists to support them rather than use any rational basis for their decisions.

The point is not that we at think we have a truly scientific approach to economics that has the power to convince most other economists of the value of our proposals. The point is that after the Great Recession, current economics is no longer reputable. The Great Recession exposed the fact that devising economic policies today is, at best, a guessing game that anyone can play. Today's economics lost its trial in the court of reality. It is time to challenge conventional economic wisdom, and that is what we are doing at

(Please note that once again, we are trying to shorten our posts so we can work on our book.)

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2014 TheOtherSideOfCapitalism