Monday, May 05, 2014

Geeks and money



Neal Stephenson is among my all-time favorite authors. Many dozens of hours of my youth were spent lost in the pages of a Neal Stephenson book, and yet I do not consider these hours "lost" in any way. Though Stephenson is best known for visionary science fiction, he is equally skilled as an ethnographer of geeks. As if that weren't cool enough, he occasionally serves up highly insightful commentary on the state of innovation.

Yet like his one-time protagonist Isaac Newton, Stephenson has always had a few curious obsessions unrelated to the main body of his work. Prominent among these is his interest in the phenomenon of money, which plays some kind of role in nearly every Stephenson yarn. Despite his general perspicacity, I'm afraid that Stephenson is as much of a mystic when it comes to monetary economics as Newton was when it came to alchemy.

For example, take his 1995 story, "The Great Simoleon Caper", in which he presages the development of a Bitcoin-like alternative currency. In that story, a protagonist laments the damage that inflation is doing to his savings:
I graduated college with a thousand bucks in savings. With inflation at 10% and rising, that buys a lot fewer Leinenkugels than it did a year ago.
Now, this is believable - a kid just out of college might be silly enough to keep his nest egg in a checking account even in a time of 10% inflation. But if he had half a milligram of sense, the kid would buy something whose interest rate was adjusted for the 10% inflation.

Remember, unexpected inflation hurts savers, but expected inflation doesn't. If inflation runs at 10% forever, people will just structure their nominal debt contracts to take this into account, by raising the nominal interest rate. In fact, this happened in response to the persistent inflation of the late 70s:

Figure 1 – Nominal Interest Rates, Real Interest Rates, and Inflation Rates, 1959–2008\

It's the unexpected swings in inflation that take away the ability of your savings to buy Leinenkugels (whatever those are).

On the next line, Stephenson offers an explanation for inflation:
"The government's never going to get its act together on the budget," Joe says. "It can't. Inflation will just get worse. People will put their money elsewhere."
This is a theory called the "fiscal theory of the price level", and in Stephenson's defense it has been advanced by a number of prominent economists, including recent Nobel winner Chris Sims. But recent events in places like Japan have not been kind to this theory; even as Japan's government debt has skyrocketed to unprecedented, astronomical levels, the country has remained mired in deflation. Nor is Japan unique in this regard. Of course, Stephenson could not have known in 1995 that this would happen, so let's cut him some slack in this case.

In later writings, Stephenson wrestles with the age-old question of what exactly it is that gives money value. In his 2011 novel Reamde, which postulates a Bitcoin-like system merged into a World of Warcraft-style online game, Stephenson echoes a common trope about gold, a metal that in the past was often used to make coins that were used for transactions:
Gold, he learned, was considered to be a reliable store of value because extracting it from the ground required a certain amount of effort that tended to remain stable over time. When new, easy-to-mine gold deposits were found, or new mining technologies developed, the value of gold tended to fall.
Although the phrase "was considered to be" entails a certain amount of ambiguity, Stephenson must be given a rap on the wrist here for failing to notice that gold is not, in fact, a reliable store of value, and has not been one ever since governments stopped fixing the price of the metal. Here is a picture of gold's dollar price from 1970 through 2005:




As you can see, from 1980 through 2000, gold's value fell in dollar terms. If you were a 50-year-old living in 1980, and you bought gold under the impression that it was a "reliable store of value", then by the time you were forced to retire, you would have lost around half of your investment. Yet no major gold deposits or advances in mining techniques occurred between 1981 and 1982, when gold's price crashed precipitously. Gold lost its value because of something unrelated to the difficulty of getting gold out of the ground.

Money is a really weird thing, it turns out. It has to fulfill several roles at once - it has to be a stable short-term store of value, but also a medium of exchange and unit of account. Figuring out how it is that one object can fulfill all those roles - and when one of the roles might come to dominate the others - is no easy task. In fact, it turns out that there is a whole tribe of geeks - several tribes, actually - who have dedicated quite a lot of time and brain power to plumbing the mysteries of money. For example, in this excellent blog post (and also this one), David Andolfatto - a very smart geek who has spent quite a bit of time thinking about the nature of money - explains why gold is no longer used in transactions. (Happily for Stephenson and other Bitcoin fans, it turns out that Andolfatto thinks Bitcoin might someday end up being a lot better than gold - or anything else; see also here and here.)

In fact, the last few years have turned a lot of monetary theories on their head. Quantitative easing, which had scared quite a lot of people about the prospect of high inflation, ended up causing nothing of the kind. Gold climbed to dizzying heights and promptly lost a third of its value. Simple folk theories of money continued to prove incongruent with observed reality.

Geeks who are interested in money should know that if believers in a gold standard are like alchemists, there are a lot of very smart people out there trying to invent chemistry. The question of money demand is a hard one, and the human race doesn't really have good answers to this question yet. It's not a problem that was solved 400 years ago - it's a problem still waiting to be solved.

79 comments:

  1. Anonymous2:02 PM

    Not to mention the fact that anyone who graduates from college with savings is already way ahead of the game. A realistic college grad with tens of thousands of debt loves inflation!

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    1. It also depends on the kind of inflation. If you have moderate deflation or too-low inflation, the job market for recent college grads is probably pretty bad (something econ professors and successful writers don't need to worry about) and it will be difficult for grads to pay down their student debts. If you have crazy debt deflation like during the Depression or crazy inflation like Weimar or Zimbabwe, you're up the creek as society is probably falling apart.

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    2. Phil Koop2:44 PM

      A college grad with debt loves unexpected inflation. Expected inflation is priced into nominal debt.

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    3. It depends on the particulars, I suppose. If you have a lot of debt but you're on a payment plan where you're not paying too much money and you have some money in savings, then in the short term inflation is more annoying even if in the longer term it relieves that debt.

      Phil Koop: Federal loans have their interest rates fixed by law (or at least most of them do) so unlike private loans it doesn't take into account expected inflation.

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    4. Phil Koop4:33 PM

      "Federal loans have their interest rates fixed by law"

      Yes they do!

      "so unlike private loans it doesn't take into account expected inflation"

      But that is a non-sequitur which is not supported by the "revealed preferences" of Congress, which are to make a profit on their student loans.

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    5. College degree in a STEM major is worth the money

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    6. "It also depends on the kind of inflation."

      Even hyperinflation can be (and has been) stopped without society falling apart. Plenty of countries have done this by dumping their old currency and replacing it with a new, stable one. When the inflation hawks bring up outliers like Weimar and Zimbabwe it’s disingenuous, as it insinuates that the political problems of such countries are the necessary result of runaway inflation. Obviously, yelling about how we might become the next Peru doesn’t have the same kind of weight.

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    7. "It also depends on the kind of inflation. If you have moderate deflation or too-low inflation, the job market for recent college grads is probably pretty bad (something econ professors and successful writers don't need to worry about) and it will be difficult for grads to pay down their student debts. If you have crazy debt deflation like during the Depression or crazy inflation like Weimar or Zimbabwe, you're up the creek as society is probably falling apart."

      I think that the experience of the 1970's in the USA will still affect thought for another few decades. People don't realize that deflation just doesn't happen; it's caused by something bad.

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  2. Anonymous2:15 PM

    I love you Noah.

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    1. I love you too, commenter.

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    2. Anonymous12:16 AM

      Then why don't you return my calls?

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    3. I'm just DHVing.

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  3. Anonymous2:44 PM

    I have never understood the soft spot that otherwise brilliant macro geeks like Noah and Brad Delong (and even Krugman) have for libertarian sci-fi writers. I mean, I used to love that stuff too. But then I turned 14 . . .

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    1. Most sci-fi writers are libertarian in the more general sense (not in the bullshit Ron Paul sense). Sci-fi is all about dreaming big, and humanity has always dreamed of being free of dependence on other humans.

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    2. Anonymous11:32 AM

      You can call it "dreaming big," but to me it usually looks more like "creating my own toy world and imposing my narrow-minded conceptions of human nature onto it."

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    3. Yeah, dime-store philosophy wrapped in a weak escapist power fantasy is kind of annoying. I suppose for Charlie Stross you could replace “dime-store philosophy” with “collection of Popular Mechanics articles.”

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    4. You can call it "dreaming big," but to me it usually looks more like "creating my own toy world and imposing my narrow-minded conceptions of human nature onto it."

      That's called "fiction", hoss.

      Yeah, dime-store philosophy wrapped in a weak escapist power fantasy is kind of annoying.

      I would not describe any good sci-fi that way. Ayn Rand, maybe so.

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    5. "I would not describe any good sci-fi that way."

      Likewise, I wouldn’t consider anything that fits that description to be good sci-fi.

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    6. Anonymous11:59 AM

      Really, Noah? That's what you think fiction is all about? How sad for you.

      And is it really the utopian dream of humanity to live free of dependence on other human beings? That sounds like the essence of adolescent fantasy to me. Not exactly a recipe for a happy existence.

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    7. Stephenson gets a _lot_ of things wrong in that article. Manned space travel is a complete bust (it's way more expensive than any of the sci-fi types thought). We gave it a good shot with the shuttle, but for the cost of the shuttle transportation, we could have put up multiple telescopes way better (and in way better orbits) than the Hubble. And the ISS is a complete bust, too: About all that's happening there is guppy experiments suggested by grade school children. He starts out with a good point that the Fukushima reactors were old and flaky, but fusion has always been 50 years away and his cheap shots about renewable energy was stupid. Solar is getting cheaper, there is lots of interesting work happening in batteries, fuel cells, and the like, and a big push in (conventional but with newer designs) nuclear power could get us to 2060 with acceptable levels of global warming. (I don't see that happening, but it's possible as an engineering question.)

      The bottom line is that real science is way more interesting than sci-fi, and the sci-fi types fixation on manned space travel has set science back, a lot.

      So I don't buy the sci-fi writers' argument that sci-fi lets them think about interesting possible futures. Between the NIMBY and green anti-nuke types and the head-in-the-sand US conservatives, I suspect this planet will be a major disaster in 2100. And sci-fi isn't going to tell us what to do about that.

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  4. James2:53 PM

    I thought The Diamond Age was awesome.

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  5. Phil Koop2:56 PM

    You forgot Cryptonomicon, the plot of which incorporates the premise that buried war gold could be used to enable anonymous banking using gold-backed digital currency thus inevitably ushering in a glorious age of Libertarian prosperity.

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    1. I didn't forget it, but I couldn't find a juicy quote!

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    2. Is it absurd to assume that an independent currency without a nation state backing it would need some kind of backing. Of course bitcoins works but it seems to be backwards from normal currencies where the value comes primarily because of its use as a medium of exchange.

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  6. Noah, if you like Stephenson, you should check out Charles Stross. His latest book, Neptune's Brood, is set far in the post-human future but its central issue is the problem of interstellar debt. Don't read this if you think you're too old for sci-fi.

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    1. Yep! I've read lots of Stross, but not Neptune's Brood yet.

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    2. Neptune's Brood reads like it was written to be a honeypot for economics geeks.

      (Naturally I loved it.)

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  7. I assume that you were being rhetorical, but Leinenkugel is a midwestern brewery. I agree with you about Stephenson, his discussion of the proper way to eat Captain Crunch in Cryptonomicon is incredible.

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    1. Actually I was just being colorful...I googled it. ;-)

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    2. Autonomous Coward1:01 PM

      Their beer is a pretty meh mesobrew (and every one of their beers also has the exact same aftertaste, damnit) but their craft brewing unit "Big Eddy" has a *decent* Russian Imperial Stout. Not good by any means but if it's that or MGD I'd take it (damning with faint praise: I does it).

      Of course, any place that stocks that Russian Imperial Stout will almost certainly have a half-dozen other, better options too so it's a fairly moot point.

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  8. "I'm afraid that Stephenson is as much of a mystic when it comes to monetary economics as Newton was when it came to alchemy."

    Newton was a mystic when it came to physics as well.

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  9. Even as an avowed monetarist and fed supporter, gold is a good investment if there are no alternatives.If you are living in a 3rd or 2nd world country that is undergoing massive currency devaluation gold or silver is a great place to put your money. It's also a good hedge during market volatility and a proxy for global growth since developing economies -citizens and central banks - will demand more. The BRIC economic boom is bullish for gold

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  10. Anonymous3:58 PM

    I love Stephenson too, but don't become a gold basher. JPM and the CME accept it as gilt-edged collateral. It's unique in its liquidity -- you don't necessarily need to swap it into currency to transact, and the value hedges against myriad monetary risks.

    Gold is a much better energy hedge -- if you use energy, like me, you might be interested. One ounce of gold very consistently buys some 15 barrels of oil over your time horizon: 12 barrels now, 12 in 1976.

    Andolfatto is really complaining about government's broken promises in fixing gold prices, not gold itself. Gold as money, bypassing unnecessary government fix, is most people's point, but govvies just cannot keep their hands out of the currency jar.

    Also, QE and the price level is mostly a matter of currency, not reserves.

    http://informationtransfereconomics.blogspot.com/2014/02/the-role-of-central-bank-reserves-in.html

    ps if you want a easy Stephenson lite, try Daniel Suarez: Daemon.

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    1. Gold is a much better energy hedge -- if you use energy, like me, you might be interested. One ounce of gold very consistently buys some 15 barrels of oil over your time horizon: 12 barrels now, 12 in 1976.

      Why not just buy oil futures? Do I need to hedge for 40 years in the future?

      Gold as money, bypassing unnecessary government fix, is most people's point

      There's no law against using gold as money. But no one does it.

      ps if you want a easy Stephenson lite, try Daniel Suarez: Daemon.

      Thanks, I'll check it out.

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    2. Anonymous4:39 PM

      Ask:Receive!

      1) Can't hedge long term with oil futures -- the roll will kill you. Ain't happening.

      2) Well, the IRS and capital gains, barter and all. It's illegal. That's why nobody does it. Conversely, if there Really is no problem with (or demand for) using gold as money, the IRS should treat it as 1:1 money!

      Also re bitcoin, I buy Cowen's argument: low marginal costs to create cryptocoins means that it cannot be a store of value (and therefore not a means of account), but only a medium of exchange. But, as a competitive free market MOE, lord how can crypto rock hard.

      http://marginalrevolution.com/marginalrevolution/2013/12/how-and-why-bitcoin-will-plummet-in-price.html

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    3. You can't buy oil futures but you can buy shares in Canadian Oil Sands or Suncor - you have a shot at participating in long term price appreciation and get dividends.

      If you want a simple store of "energy" as a long hedge against rising energy prices aluminum ingots have a high energy input. Buy aluminum ingots and stack them up in a dry climate somewhere.

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    4. Yeah, the roll over cost in oil futures will kill you.

      The trouble with buying shares in a producer is the risk that the company might decide to start hedging their own production, at which point the shares cease to serve the purpose for which you bought them! I can see the argument that gold represents a certain amount of sunk energy cost. (You can see a direct equivalence between gold & bitcoin here: bitcoin is electronic gold, with both the good & the bad that goes along with that.)

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    5. My point is that it's weird to want to hedge for that long of a term...also Absalon is correct.

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  11. Remember, unexpected inflation hurts savers, but expected inflation doesn't. If inflation runs at 10% forever, people will just structure their nominal debt contracts to take this into account, by raising the nominal interest rate. In fact, this happened in response to the persistent inflation of the late 70s:

    It's nice non-monetarists are starting to notice this. The reverse pheonomenon is also why we have low nominal rates today, which reveals the whole "liquidity trap" model as nonsense: CBs can always promise to inflate, but sometimes just choose not to for various reasons. (Declining inflation expectations also boosted actual inflation-adjusted long term bond yields, which creates a bit of an illusory advantage for the modern saver.)

    However, on the whole, Neal is more correct than Noah here imho. It's true that lots of modern economies (most notably Japan) have managed to run up large deficits while also convincing markets they will not inflate, but many more have run large deficits without convincing markets they will not inflate, and have suffered painful inflation as a result, and in those places gold is usually a better store of value -- precisely because of the fluctuating expectations Noah correctly identifies as the real driver of losses.

    As Acemoglu might say, institutions matter.

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    1. (Yes, it is true QE is not inflationary, probably partly because the Fed/BOJ keep promising it won't be inflationary via the inflation target, and partly because temporary liqudity injections aren't inflationary (but I repeat myself). That just argues QE + unchanging inflation target is a terrible schizophrenic policy, not that liquidity traps make any sense. CBs can always change their inflation target, and they can always make the promise credible by buying stuff.)

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    2. Nathanael7:21 PM

      The reason QE is not inflationary relates to who gets the money.

      Inflation relates to money in its medium-of-exchange role. Not its store-of-value role. You have to be rather careful if you're trying to measure how much money is actually *going into circulation* -- only money which gets promptly respent is going into circulation.

      Lend money from the Fed to insolvent banks, it's just accounting shuffling, it doesn't cause people to buy real goods or real services.

      On the other hand, you could probably generate some inflation by directly transferring money (not loans) to several million poor people.

      "What financiers in markets believe" is entirely secondary. The amount of money bid by the 99% in the attempt to get food, clothing, and shelter is primary when it comes to understanding inflation.

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  12. Noah -

    Leinekugel = the sweet, sweet necar of the Gods... brewed in Chippewa Falls, WI... see here: https://leinie.com/default.aspx#landing

    When I was an undergrad, used to be able to hoard 'em at $5 a case (24 long-necks)... but that, sadly, was a long time ago (USInflation.org's calculator tells me I can only get half-a-case today at that infl-adj. price... *sigh*)

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    1. When I used to live in WI eons ago (don't ask), the Leini's label said it was brewed from the "Big Eddie Springs". The reigning joke was that Big Eddie was a horse.

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  13. Is there part of being a geek that says you have to spend your life thinking about "problems" that don't involve human beings being frustrated in their search for food, shelter, and/or happiness?

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    1. It is perhaps the meaning of the word?

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  14. In Fallout: A Post Nuclear Role Playing Game, the commonly accepted currency is bottle caps and the most important capital good in the game seems to be 'brahmin' - two-headed cattle.

    Just sharing my favorite geek currency so far. And I hope you guys go out of your way to recycle those hard caps, I don't want to lug too many when I come out of my subterran vault to explore the post-nuclear world.

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  15. I'd like to proffer this theory based on the idea that money is about moving information around:

    http://informationtransfereconomics.blogspot.com/2014/03/how-money-transfers-information.html

    I'm not a complete wacko -- it reduces to the quantity theory of money in a particular limit and is based on supply and demand. And there are pretty pictures! Like this one:

    http://t.co/mYE1fa3gfj

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  16. Much cooler than Stephenson on economics is Rod Clark, editor of the long-running successful literary magazine, Rosebud, which has long published famous sci fi authors, including on numerous occasions, the late Ray Bradbury.

    Anyway, Clark is also an author himself of the satirical and prophetic, Redshift Greenstreem from CBR Press, first out in 2000 and then reprinted in 2011 after it was clear that he had called a lot of stuff in the crash and the previous decade more generally about economic developments. Among other things he forecast the rise of high frequency tradiing, that Greenspan's reputation would decline, and he independently coined the term "econophysics," using it in ways not too far off from how it is actually used, although it had been around for awhile in 2000.

    Another odd thing is that his novel was discussed on the infamous ejmr at one point, and he himself showed up there to comment on the discussion, having spotted it by googling himself and his novel, a most bizarre and probably unprecedented development, one of the weirder in the history of curious venue.

    Barkley Rosser

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    1. BTW, like Stephenson, Pynchon, Wallace, and others of that ilk, J. Roderick Clark is something of a polymath, and much more a playwright than novelist, as well as prominent literary journal editor. Curiously, his late father, Andrew Clark, originally of Canada, was a cartographer for the old OSS of WW II and one of the founders of the historial discipline of historical geography.

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    2. Cool, I'll check him out. Have you seen my list of "sci-fi novels for economists"?

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    3. No. Is there a nice link for them?

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    4. Aww, JBR, I thought you were a regular reader! ;-)

      http://noahpinionblog.blogspot.com/2013/05/science-fiction-for-economists.html

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  17. I guess in a mathematical sense, the question of the value of money will never be solved because it is only worth what other people believe it is worth. It's not x=y, but x=x. Of course, one can try (and one does try) to calculate the value of a currency by the strength of the economy that backs it, the expected strength, the reliability of the central bank and so on and on.... but there will never be a definite answer that could serve as the one fixed point to move the earth, because people are different. It's simple nature that we all weren't born the same day, or have the same family status, or the same knowledge about economics etc...

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    1. Anonymous2:44 PM

      OR THE same knowledge about life that destroy all economic features....like the dead people in the sahel in 1985 or the haitians in 2010 or the ukranians in...20??

      it's simple nuke them all ....and the dollar is eternal

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  18. XFaure10:15 AM

    If gold is volatile with respect to dollar, then dollar is volatile wrt gold. Short-term purchasing power stability of the dollar is tautologic. Since the dollar is the official currency in the US, prices are denominated in dollar and, merchants don't change their prices everyday.

    To put it differrently, EUR/USD has gone from 0.85 to 1.40 in 15 years. If I follow your line of reasoning USD is a poor candidate for a currency. If you were a 55 years old in 1999 and you bought dollars under the impression that it was a "reliable store of value", then by the time you were forced to retire, you would have lost around half of your investment.

    The main difference between fiat currencies and gold (or BTC, for that respect) is not their stability. It's the fact that fiat currencies empower a small group of people (CBs and controlling govts) to manipulate those currencies for better or for worse. If you believe in these people's perception, competence and benevolence, then you will prefer fiat currencies.

    As you say, "money is a really weird thing" and "The question of money demand is a hard one, and the human race doesn't really have good answers to this question yet. It's not a problem that was solved 400 years ago - it's a problem still waiting to be solved."

    I also observe that virtually every central banker is attacked by virtually every economist for being too dovish or too hawkish or whatever.

    Maybe I'm missing something, but I don't see the case for fiat currency as a strong one.

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  19. I don't understand how the gold price fluctuations over time show that gold is not a good store of value. Perhaps some of you guys can help me out. The chart shows gold in terms of dollars. You could say that gold is stable and it's the US dollar that's moving around. Or you could say the dollar is stable and it's the gold that's fluctuating.

    If we plotted US dollars in terms of zimbabwe dollars and see great variation over time, we would not say that us dollar is not stable. It seems you should compare gold or bit coin against real goods that they would purchase. That would make more sense, right?

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    1. I don't understand how the gold price fluctuations over time show that gold is not a good store of value. Perhaps some of you guys can help me out.

      Sure.

      The question is: Why would you want to store value? Do you want to put your wealth in a vault, to be accessed by your great-grandchildren? Or are you saving for retirement?

      If you're saving for retirement, and you take a lot of risk, that means there's a chance that your wealth will have decreased at the time that you retire, meaning you must live a poorer life in retirement.

      If you're putting your wealth in a time-capsule to be accessed by your great-grandchildren, I can't help you with investment advice...

      The chart shows gold in terms of dollars. You could say that gold is stable and it's the US dollar that's moving around. Or you could say the dollar is stable and it's the gold that's fluctuating.

      Correct! But remember, U.S. dollars are the only currency that most stores allow you to use in order to purchase stuff. So for most consumption needs, you need to pay in dollars; if gold's price goes down against the dollar, it means fewer steaks for your ounce of gold (though of course the price of steak is moving around as well).

      It seems you should compare gold or bit coin against real goods that they would purchase. That would make more sense, right?

      Sure. To compare the value of gold to a reasonably "average" and reasonably stable "basket" of real consumer goods, just deflate the dollar gold price by the CPI. Does that make sense?

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    2. Just to reinforce this, consider if you had bought gold at the end of the 70s or beginning of the 80s. It collapsed against not only the dollar but any reasonable basked of currencies, and stayed down, indeed gradually declined further in real terms, for a good two decades. The it rose faster than inflation for a bit over a decade, but it has been substantially down since its peak in 2011 at over $1900 per ounce, and looks unlikely to return to that level any time soon. You can say whatever you want about gold as some stable store of value in the face of such gyrations, but more imeediately all I can say is that I hope you did not sell all your other assets to plunge into gold at $1900 per ounce.

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    3. "Correct! But remember, U.S. dollars are the only currency that most stores allow you to use in order to purchase stuff. So for most consumption needs, you need to pay in dollars; if gold's price goes down against the dollar, it means fewer steaks for your ounce of gold (though of course the price of steak is moving around as well)."


      This is the part I don't understand. To me it's like begging the question. If you live in zimbabwe and you have to convert to zimbabwe dollars to buy goods (suppose govt bans the use of US dolalrs), does this make US dollar a bad store of value because it varies too much wrt zimbabwe dollars? Tehcnically, it's true if you have no choice, but seems strange to call US dollar a bad store of value as a result.

      "Sure. To compare the value of gold to a reasonably "average" and reasonably stable "basket" of real consumer goods, just deflate the dollar gold price by the CPI. Does that make sense?"

      Yes, I think that may do it! You can compare the real return volatility of gold to volatility of CPI. This may work for my zimbabwe example above as well, since the US $ will covary negatively with zimbabwe real returns.

      I am not sure gold has enough of negative covariation with CPI to reduce its variation of real returns compared to the variation of CPI



      "Just to reinforce this, consider if you had bought gold at the end of the 70s or beginning of the 80s. It collapsed against not only the dollar but any reasonable basked of currencies, and stayed down, indeed gradually declined further in real terms, for a good two decades. "

      This poses the same problem for me, but in terms of other currencies.

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  20. Anonymous1:56 PM

    Noah, you short-change the 'fiscal theory of the price level' in your characterisation and the Japanese experience hardly presents a refutation of it.

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    1. You think so? I was under the impression that the FTPL hadn't received a lot of empirical support, though some people had claimed to have found evidence of it in some countries.

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    2. Anonymous9:53 AM

      "..the FTPL hadn't received a lot of empirical support".

      Yep, the theory hasn't attracted too many adherents either - Woodford was an early advocate then abandoned it - and it has come under criticism on theoretic grounds. Yet, virtually every episode of hyperinflation suggests a relationship of some sort...

      I think FTPLers would say this about Japan; the absence of price movements that match the 'explosion' of debt in Japan reflects the faith that Japanese citizens have in their fiscal authorities to maintain sustainability. FTPL sees the government constraint as an equilibrium condition, with expectations playing a determining role.

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  21. Anonymous3:40 PM

    The Fisher relation has to be adjusted to reflect taxes. With a marginal tax rate of 33%, interest rates need to rise by 15% in face of a 10% rise in expected inflation to leave lenders in the same real position.

    Did interest rates rise enough during the 1970s by enough to compensate for both inflation and the taxes paid on the inflation component of nominal interest? It does not look it from your graph.

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  22. Anonymous3:49 PM

    "there are a lot of very smart people out there trying to invent chemistry. The question of money demand is a hard one, and the human race doesn't really have good answers to this question yet. It's not a problem that was solved 400 years ago - it's a problem still waiting to be solved."

    Good answers to the question of money demand have been around for a long time in the form of chartalism.

    "A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince. (Smith, 1776, Wealth of Nations, p. 312.)"

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  23. Anonymous5:02 PM

    Ahhh counterfeiting, it's a victimless crime.

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  24. Anonymous5:09 PM

    In my old days in the industry, we, and our bosses, believed gold was in fact a reasonable storehouse of value. You could mine about .25 oz/ton gold underground using human labor with picks and shovels, today you can mine about .25 oz/ton gold underground using mechanization. You could trade an ounce of gold for so many ergs of energy, windpower or human effort, today you can get so many ergs of energy...oil, etc. . You can trade an ounce of gold for a pretty good suit in 1890 and today, all these of course within some reasonable accounting bounds for local price. Heap leach technology changed the supply of gold a bit, but as yet still most gold is held in bullion vaults, little supply/demand relationships are evident worldwide. So why doesn't that work today?

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    Replies
    1. Just look at the graph I posted in my posty post.

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    2. Anonymous12:52 PM

      Yeah, I checked that out. As other posters have questioned, is the dollar a "storehouse of value", or a medium of exhange? I guess I'd be more convinced should we compare commodity to commodity, rather than to dollars. Oil would seem to be a decent commodity, ..

      I graphed 2 series on FRED: london daily gold (GOLDAMGBD228NLBM) and Cushing OK Crude daily (DCOILWTICO)...since they're both in dollars, I presume the medium of transfer is equal. If barrels of oil are a surrogate for ergs of energy, it looks that with the exception of short term shocks, either financial or political, they're pretty similar. sorry I can't post the graph in the comments here, but..

      Thanks for replying, by the way.


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    3. Anonymous2:04 PM

      http://research.stlouisfed.org/fred2/graph/?g=A2A

      Gold to oil. It's a very effective oil hedge, straight up, and a way of preserving real energy consumption over time -- not just for your great-great grandkids. (Unlike dollars, bonds or equities.) What's not to like?!

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  25. bloop7:40 PM

    My science fiction about money goes like this: In the beginning there was infinite money compacted implosively into an infinitesimally small ball.Lacking in spacial dimensions, the ball existed only in time, if that, and was quite invisible to the naked eye.

    Then, in a split second,the ball began to shake and boogie out came electric love. Wait, that's incorrect. Out came money. Enough to fill the stratosphere.

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  26. Unanimous11:40 PM

    Money is created by society and the amount of it and the value of it fluctuate as do many things subject to fashions. If there is a lot of borrowing to buy goods and services, and not enough bank-based saving to hold the new money or repaying of bank debt to destroy old money, then inflation will tend to be high. If there is a lot of borrowing to buy houses or stocks, and not enough bank-based saving to hold the new money or repaying of bank debt to destroy old money, then asset bubbles will tend to occur. The mechanisms of it are clear enough (although often times wrongly described by economics text books). But predicating how much people will want to borrow, spend, and save in the future, and the forms in which they will try to do it, is very difficult. The mystery is in trying to predict how society will behave, and it is the same mystery involved in much of economics, not anything specially related to money.

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    Replies
    1. bloob2:44 AM

      You couldn't predict the past much less the future. Give it up!

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  27. Anonymous8:59 AM

    Noah, a request a bit off topic. It think you should really write a post on the debate exogenous vs endogenous money. All these blog discussions about it were just confusing. Need your opinion! :)

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  28. [In the event that we do take off and nuke the site from orbit, can we carry enough TV dinners on board to make it worth our while?]

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  29. I don't think that Stephenson is that good at characters or plotting, but then I only read a couple of his books. I wrote an essay a while back explaining why I did not like his work, but it something I am a little embarrassed about now - I said he wasn't human, then I heard talk that he may be on the spectrum. An incredibly smart guy, and a great world-builder, but a crap storyteller.

    http://alphabetofmadness.blogspot.com/2010/03/why-i-hate-neal-stephenson.html

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  30. Anonymous5:45 PM

    Noah,

    While I will be amongst the first to recognise that there are many out there who overestimate the extent to which gold serves as a store of value, on the basis of the various articles of yours I have read, I suspect that for any other possible positive statement this guy could have made on the merits of gold as an investment proposition, you would have been extremely likely to pick up on it and challenge it in this post.

    While here your position is obviously defendable as you have honed in on the 'reliable' element in his specific assertion, as a general criticism of an informed gold investor this imo is strawmanning in the extreme - obviously most described gold investors are not under the delusion that in the metal's thousands of years of history of being used as a store of value, there does not exist the possibility that it could underperform vs a given specific currency for 30 years at a time.

    My impression that you appear motivated on the topic of gold is different to impression i have gotten from reading you on other topics, where you appear more objective on my reading. We are all human, do you believe that your musings on gold are indeed wholly objective, or do you think they are influenced to some degree by other factors, for example an aversion to the political views of a typical vocal Internet gold bug, or any other factor?

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  31. Nathanael7:16 PM

    Money's a social phenomenon. If you can explain the tulip mania, you can explain money...

    ....yeah, I know, nobody has properly explained the tulip mania yet either.

    Tricky problem of social psychology.

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