Value of money, inflation, central banking. If value is a subjective matter, the inflation indicators often used are de facto useless.
They say that beauty is in the eyes of the seer. Likewise, the value is in the eyes of the evaluator. Value in itself is subjective. It is in us, not in things. Goods and services do not have their "intrinsic value" in themselves, they only have the value that we ascribe to them.
Why would money be an exception? Even money has no intrinsic value, without people our value could not logically be attributed to them. The value of money is subjective.
The value of money is subjective. Only the individual decides whether the money brings benefits (has value for him) or not. Money is no different from other goods - their exchangeability is their specific property, just as the specific property of metals is their strength and formability. These specific characteristics are what the goods can satisfy our needs, making the goods useful. A specific feature of money is its convertibility into other goods. In essence, however, it is no different from any other farm.
If the value of money is subjective, it is nonsense to say that the value of money is given by what we can buy for it, that is, that the value of money is given by the price level. That's bullshit. The price level does not determine the value of money. There is no "objective determination of the value of money".
If people see money as more valuable than other goods, then people save money. If people do not see money more valuable than other goods, people do not save, but spend.
If people spend their money en masse, instead of saving, the money for a pile of people is less valuable than the goods they can now buy.
That wouldn't mean anything so bad. People spend, so they don't save. Their time preferences are low - people want goods now and not in a few years. The interest rate is so high because the supply of loan funds from which it is possible to lend to investors for investment is low and banks are thus willing to offer people a higher profit on their savings.
It is logical - if people want to spend now, it means that they are not interested in certain future goods. Interest rates are high, banks find it more difficult to find capital (people do not save) and so they pay more attention to who they lend to whom (resources are limited). When they already lend, they choose more carefully which investment to actually lend to - they promise savers high returns on borrowed deposits, high returns can only come from very successful investments.
General economic growth is slow with higher consumption and savings. There is no capital (savings -> investments) from which innovations would arise, which would increase work efficiency in the future and create new capital (machines, resources).
High interest rates make people's consumption more expensive - they are deprived of possible income from savings (opportunity costs). Saving (investment) a consumption are competitive opportunities to use money. Their competition is reflected in their "battle" for customers with the promise of higher returns - but as a result, they work hand in hand.
When people consume, interest rates and savings income rise until people start saving. Subsequently, projects will be invested that will bring us better goods and services worthy of our consumption in the future. The interest rate drops, people then start consuming. The competition for savings and consumption has brought better goods and return on investment - hand in hand.
So far we have not encountered any problem. Yet.
Inflation, deflation and central banks
The system we have described below is an ideal system that works according to the time preferences of consumers / savers and investors. Unfortunately, there is a state and his Ministry of Monetary Policy A central bank that changes a lot.
First, we explain what the Central Bank does on a system operating on the simplest gold standard, where 1 unit of money is directly covered by some amount of gold.
Imagine that 1 crown is covered with 10 grams of gold. What is money then? Money is gold here, not the crown. The crown (whether metal or paper) is just a voucher for gold. Nothing more, nothing less.
Why is money exactly gold? It is because of its properties that people see as useful. Gold is money because people have chosen it according to their preferences. It corresponds to the preferences of consumers / savers / investors about the properties of money. It is rare, it is beautiful, it is relatively easy to divide and most importantly - it is not easy to "print". In itself, gold is the perfect store of value.
People see value in gold, not in the vouchers themselves (crowns). If there is 10 grams of gold behind one crown, people see behind it gold (crown) some value. If, after ten years, there is only 1 gram of gold behind one crown, the value seen in those vouchers is logically lower (there is a lower amount of gold behind them, in which that value is seen). It doesn't matter how much or how many times the value is lower, the main thing is that it really is lower.
Ladies and gentlemen, this is inflation. It doesn't matter at all whether the price level has changed, if oil has risen or if speculators have started speculating "differently" than usual. This does not cause inflation per se, it does not cause inflation per se. Inflation is the loss of value of money.
What causes inflation? Imagine working hard all your life and saving for retirement. You will save honestly in your national currency. When you were 20 years old and you started saving, 1 crown was worth 10 grams zlata. When you retire at 70, 1 crown will be worth 50 gram of gold after 1 years. Within 50 years, the crown has lost 90% of its value.
Let's say you've saved 50 crowns in 100 years. In your 000s, that would mean 20 million grams zlata, in other words - tons of gold. Unfortunately, thanks to inflation, in your 70s you only have 100 crowns available 100 kilograms of gold, the equivalent of 10 crowns from your 000 years.
You saved "yourself" instead of 50 years for only 5 years. 45 years of renunciation were thrown out the window.
That's it is inflation. Inflation devalues the time we all have limited. It makes our lives worthless.
The fact that the price level remains stable tells us almost nothing about inflation. If the pace of innovation continues and competition is sharply intensified, a decline in the price level can naturally be expected. The stable price level caused by the devaluation of the money supply is thus in fact inflation, because we are "in prices" depriving ourselves of the yield from the reduction of the price level.
A typical example of an "inflation-stable price level" was the 20s. The price level was stable, but innovations went at such a pace that the stability of the level was caused by the dilution of the money supply. The amount of "gold vouchers" in circulation increased several times, while the amount of gold in banks' reserves remained almost unchanged. I am talking here in particular about the situation in the United States and in the Fed's central banking system.
But how is it possible that the system does not work ideally, ie according to the (time) preferences of all participants?
Moral hazard of central banking
Here the central bank enters the whole carousel. It is a classic issue moral hazard. The central bank is the "creditor of last resort". In other words, if a bank runs out of money from its clients because it has lent recklessly to too risky projects, an "irresponsible" commercial bank can save itself from the run with a loan from the central bank, which turns on printing machines and sends new vouchers to the bank (or in now the national currency).
It doesn't matter if banks use this option directly or not. The main thing is that Central banking is thus a system of socialization of losses. If the central bank prints money for the bank, we will all pay for the bank's loss by losing the value of our own money and savings. An irresponsible bank also earns money as a result - it will receive money whose value will be perceived as the same as other money. An irresponsible commercial bank buys with new money, but at old prices. However, everyone else will start to lose money, they will start to lose weight. The value of money will gradually decrease, ie the price level will increase (or not decrease).
If Irresponsible Commercial pays the central bank less for that rescue loan than the resulting inflation, Irresponsible Commercial will earn - for all of us. It is a reward for incompetence and irresponsibility. Rewarding mistakes.
However, the problem of central banking is really systematic and principled. All this moral hazard is fueled by inefficiency caused by the lack of competition in the banking sector. The central bank often also performs "supervision" in the banking and financial markets. If not, there is usually another institution next to it that provides this.
In the interest of "consumer protection" (here savers, bank clients, depositors) there are usually very high requirements for obtaining a kind of "banking license". In fact, a "just someone" cannot come to the banking market. The banking market is a market where competition works very weakly because it has been replaced by artificial rules of regulation.
Inefficiency in the banking market means ill-treatment of depositors' funds - lending for non-viable projects. It is the feeding of moral hazard. The banking market is de facto not working due to the central bank. Giving the central bank additional powers to remedy this situation is naive. It's like giving an arsonist gasoline to put out a fire.
It is this great moral hazard that makes it possible raspberries, that is, bad investment. Inflation, created by the moral hazard of the regulated central banking system, is the primary cause of recent economic crises.
Commodity Growth - An escape from fiat currencies
Currently, the price of commodities is "rising" - butter breaks historical records, after gold and silver is literally a mania. What is it?
It is possible that the price of commodities is not rising, but the value is falling money (fiat currency). In recent years, large central banks have de facto competed in which of them will devalue their currency more. Fed-led quantitative easing was just the most visible example.
Thus, "bad" speculators, but rather central bankers, are not to blame for rising commodity prices. After all, all this growth indicates a loss of value for money, ie inflation. And until it is possible to pay for the construction of a production hall with butter, for example (the value of which is beginning to appear more stable than the value of money), monetary inflation will still cause economic crises in the spirit of Austrian business cycle theory.
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