tag:blogger.com,1999:blog-17232051.post3096162468200393533..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Money is just little green pieces of paper!Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger147125tag:blogger.com,1999:blog-17232051.post-68107556721015733962013-11-21T10:41:52.940-05:002013-11-21T10:41:52.940-05:00Monetary economy is an illusion. Created long ago ...Monetary economy is an illusion. Created long ago so the weak could survive. PERIOD. In the event of economic collapse, ALL pieces of paper become worhthless. I mean really, when that happens, (and history has shown us that eventually, it will.) what would you rather have? A pound of gold, or a gallon of fresh water? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-46307576193330143592012-12-14T19:53:50.421-05:002012-12-14T19:53:50.421-05:00There is no such thing as fundamental value in an ...There is no such thing as fundamental value in an economic system. all valuations are subjective, and all valuations are made without erfect information. your attempt at determining a fundamental value reminds me of early marxist economists who thought similarily. fundamental values do not allow people to have preferencs. Difference in preferences are a fundamental componet of a sucessful trade. this is literally econ 101 in any school in america. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-82006122775161224152012-11-20T03:05:48.416-05:002012-11-20T03:05:48.416-05:00It's not inflation which causes people to lose...It's not inflation which causes people to lose trust in the money. It's general mismanagement -- corrupt legal system, high unemployment, dropping industrial production, nuclear accidents, losing foreign wars...neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-60008346924355312642012-11-20T03:02:00.487-05:002012-11-20T03:02:00.487-05:00"And money is the only thing you can use to p..."And money is the only thing you can use to pay your U.S. income tax. "<br /><br />This is not actually true, even though it would be more convenient for the IRS if it were true. Consider tax liens -- they are a method of paying your taxes without money.neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8542587770650454152012-11-20T03:00:47.550-05:002012-11-20T03:00:47.550-05:00"it doesn't address the main problem, whi..."it doesn't address the main problem, which is that "non-fundamental value" is a deeply unsatisfying definition of bubble value."<br /><br />Exactly. There's a large amount of "non-fundamental" value which is in no sense bubble value -- durable non-fundamental value, you might call it. The value of institutions, the value of reputation -- these things are not "fundamental" but neither are they bubbles.neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42824727998714460252012-11-20T02:58:59.970-05:002012-11-20T02:58:59.970-05:00Pete, you don't have to imagine: google "...Pete, you don't have to imagine: google "Free Banking Period" in the 19th century USneroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80555296740885722762012-11-20T02:58:27.770-05:002012-11-20T02:58:27.770-05:00Ben, while your point is largely accurate, the *ul...Ben, while your point is largely accurate, the *ultimate* reason for taxation is redistribution of wealth away from hoarders (which is necessary for economic functioning).neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78221556424480897222012-11-20T02:56:45.949-05:002012-11-20T02:56:45.949-05:00The pieces of paper which underlie housing deeds a...The pieces of paper which underlie housing deeds are in no sense voluntary. The government will come and kick you off the land, with armed men, if you don't respect those pieces of paper. In fact, control of land is at the root of the entire concept of government.<br /><br />The fact is, money, like "land ownership", is a *shared delusion* or a *societal construct* -- it is based on *trust* or *mutual agreement*. It's all in our heads, but that doesn't make it any less real.neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-85210425819298824372012-11-11T10:21:50.143-05:002012-11-11T10:21:50.143-05:00moeny has value
just alone the fact that people w...moeny has value<br /><br />just alone the fact that people want it, people accept it as token for goods in trading and so on, makes it extremely valuable<br /><br />value stems from people's assesment of somethinsg value<br /><br />a painting van gogh was worth a bottle of wine in the his pub down the stret when he lived<br /><br />now it is worth several mansions<br /><br /><br />even if what teh gyu claoimed was true<br /><br />moeny still had teh productiuon cost so it is at least worth the paint an dteh paper<br /><br /><br />look at it this way gold or diamonds are utterly useless for the common people<br />yet they value them highly just beacue society does vlaue those highly<br /><br />you cannot eat gold<br />and the technical applications for it dont justify it's price<br /><br />but because eveyone thinks it is a sign of wealth and status it becomes extremely valuable<br /><br />to me there is no value in owning any gold or jewlery<br /><br />but that is juts me <br />yet if i had a piece of gold it woudl stillbe valuable because i could trade it to thers who value it<br /><br />so the value isnt dependent solely on what I value<br /><br />but also what society values<br /><br />and those are too different values<br /><br /><br />ok lets make another image: what if there was only enough food on the planet for every 10th person?<br /><br />woudl anyone sell a piece of bread for money?<br />no they woudlnt<br />becasue at some point if there is nothing left to buy that means if teh last fish is caught the last tree cut and teh last cow slaughtered<br /><br />what is that last steak worth?<br /><br /><br />money is a tool for trading<br /><br />we are able to trade goods by token with money<br /><br />and aslong as tehir are goods tobe tradet there is a vlaue inteh commonly acepte currency<br /><br />if tehre is no goods money ceases to exist too<br />it becoem paper<br /><br /><br />but even then there is curreecny (cigarettes/liquor and so on)<br /><br /><br /><br />if you wanted to be objective about it value is something we humans assign to something <br /><br />it isnt an independent thing<br /><br />if we change and what we value changes the value of thinsg changes<br /><br />if tomorrow we could turn shit into gold<br />nobody woudl even use gold as jewlery anymore but some teenagers<br />we wouldnt value gold<br /><br /><br />so scarcity and demand for a thing along with a lot of other social factors play into the value<br /><br /><br />how much is teh value of a barrel oil if there is no cars or other machinery that you can fuel with it?<br /><br />what is a cow worth if everyoen is a vegan?<br /><br /><br />money isnt a bubble<br /><br /><br />it is just that value of things isnt cut in stone<br /><br />they change depending on teh situation<br /><br /><br />if food became producable out of thin air by the press of a button (liek in starwars) <br /><br />food would have no value<br /><br />also if you had lunch how much will you be willing to pay for a steak i just grilled?<br /><br />it isnt as clear cut<br /><br />scarcity demand and also personal use/apreciation for a thing all factor<br /><br />one man's trash is another ones treassure!<br /><br /><br /><br /><br />joeaveragenoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-81546473417195251392012-11-09T12:02:46.009-05:002012-11-09T12:02:46.009-05:00I think many people question the actual value of c...I think many people question the actual value of currency now that there is no gold or silver standard. It is more fluctuating and unpredictable and can be impossible to really understand the value of a dollar.Justinhttp://www.financialexecutives.org/KenticoCMS/events/events.aspxnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45560517613366300042012-11-04T07:04:22.930-05:002012-11-04T07:04:22.930-05:00(Part2)
Now, let's evaluate the "$100 of ...(Part2)<br />Now, let's evaluate the "$100 of cash" in this manner. The risk free rate is 2%, so you can make new $2 for sure. Because there is no risk, risk premium is 0%. Then required return is 2%, and discount rate is 2%. The additional value that the cash makes is<br /> ($2-$2)/1.02 = $0<br />And the total value of the cash is $100 = $100 + $0.<br />Of course you can calculate the present value directly: if you have $100 of cash today (t=0), your total pay-off at the end of the year (t=1) is $100*1.02=$102. So, the present value of the cash is $102/1.02 = $100.<br /><br />I think there are two possible mistakes in Steve's "proof". The one is what we've just seen: confusion of total value and "residual (extra, additional) value" (or confusion of total pay-off and residual pay-off). The other possibility is that he assumes that "I don't invest the cash on risk-free rate, I’ll keep the cash in the drawer". Let’s see what happens.<br />Now recall the DDM model (Dividend discount model, which is an infinite period type). The price of the stock whose dividend is constant d for eternity is<br />d/(1+r) + d/(1+r)^2 + d/(1+r)^3 + ... = d/r<br /> (Here, “^” means power. For example, 2^3=8)<br /> where r is an appropriate discount rate assuming the risk. Note, in this formula the principal investment value disappears far into the infinite future, and the total value is only expressed with annual returns. <br /><br />Applying this to the cash with risk free-rate, we have<br />(because there is no risk r = risk free rate, d=$100*r)<br />$100*r/r = $100<br />Applying this to the "cash in the drawer", we have<br />$0/r = $0<br />May be the latter is what Steve meant. But this is also wrong. Because this is not the value of the cash, instead this is the value of a particular strategy: "cash in the drawer and never use it". The risk free rate is something you can get without risk or compensation, you should count it in valuation of the cash.<br />For example, you know the famous Black-Sholes formula for call option. From B-S formula, you know that the call option's price is always positive. In short if you have a (equity) call option you have the right, but not the obligation to buy an equity at a certain time (the expiration date) for a certain price (the strike price). So if the equity price is higher than the strike price at that time, you can exercise your right and your profit is "the price of the stock minus the strike price". But because it is "the right, but not the obligation", you can say "I will never exercise my right". But even if that is the case, you can't say "my call option’s price is zero". It's just your decision makes your call option valueless for yourself. If you give away the call option to someone else, it has positive value for him.<br /><br />There is another criticism for this "cash in the drawer" valuation. In reality if you keep cash in the drawer, that doesn't mean "I will never use it for eternity". Your intention is probably like "I will use it in an emergent situation" or “I will use it when I change my mind”. So, this strategy's future pay-off is not zero, the right scenario is a stochastic one, $100 in one year for some probability and $100 in two year for some probability, and so on. So, even your personal strategy's value is not zero.<br /><br />Lastly, I think one can invent some measure to express how precious the things are, and apply it to the money, and say that the money is nothing. But if you choose $ to measure $, you have always $100 = $100.<br />TOKIO<br />Tokionoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74373380854072311982012-11-04T07:02:07.365-05:002012-11-04T07:02:07.365-05:00Noah Hello! Hajime mashite. David, nice to see you...Noah Hello! Hajime mashite. David, nice to see you again! I'm the one who left some comments on "Krugman on Mistaken Identities" at Uneasy Money.<br /><br />(Sorry, because this comment is so lengthy that the blog system can’t accept. I have to divide it to two parts. This is the part 1.)<br /><br />It seems that Steve Williamson's “proof” is just a misuse of valuation technique. Let me explain. <br />But first "fundamental value". I think Steve's "fundamental" is not a theoretical term. The word "fundamental" is a kind of jargon in equity investment. "Fundamental analysis (research)" is what equity analysts do. They look at financial statements, economic environment, etc. to estimate the future of a company. "Fundamental investors" are the investors who rely on this method. Also there are non-fundamental analysis (investors). For example, technical analysis (investors). Technical investors only care about historical pattern of the movement of the price. They think like, "6 weeks moving average cross the 1 week moving average, let's buy" or "3 times of quick up-and-down followed by slow up going is a good sign to buy". So they don't care what the company really is. To sum up, "fundamental (value)" here can be interpreted as "a reasonable estimate of the price based on a reasonable scenario based on an appropriate fundamental research". (From Steve's context this seems to make sense.)<br /><br />Next, let me review the valuation technique (i.e. calculate or estimate present value of future cash-flow or pay-off) very quickly. Roughly, there are two types.<br />A: Stochastic type<br /> There are many future scenarios of cash-flow or pay-off. Calculate discounted pay-off for each scenario, and the final present value is the probability weighted sum of these discounted values. Theoretically, you should use short-risk-free rate for discounting and so called "risk-neutral probability" for weighting (academics and derivative rocket scientists), but in practice one might use "risk-free rate + risk-premium" and "real probability (i.e. the probability that you think to be real)".<br /><br />B. Non-stochastic type<br /> You choose only one scenario. Because you know that the scenario is not certain, you don't use risk-free rate for discounting, instead you use higher rate: risk-free rate + risk-premium.<br /><br />It seems that Steve Williamson's style is type B. Probably he create many scenario in his mind and choose the most plausible one as the expected scenario, that is a common style for equity analysts.<br /><br />In equity analysis, sometimes you want to calculate only the extra value that the company creates over the primal investment, instead of total value of the company. That is so called “residual income valuation“. Investors require for the company to earn at least risk free rate + risk premium. Residual income is defined as net income minus “risk free rate + risk premium”. The extra value is calculated as sum of those discounted residual incomes. Then the total value of the company is the sum of primal investment + the extra value. (“Value Added” or “EBO-model” approaches in equity valuation are of this kind)<br />For example:<br />You create a company with $100 from your pocket, based on your original business-model. In your vision, this company makes $40 in 1 year. Now, risk free rate is 2%, and risk premium for this company is supposed to be around 8%. 2% + 8% is a required return for this business. So only excess return over 10% (i.e. the return - 10%) will create additional value to your primal investment: $100. Discount rate is 10%. The additional value that your company create is ($40-$10)/1.1 = $27.3<br />Total present value of your company is $100+$27.3 = $127.3.<br />If the market agrees with this analysis and you go public and sell 100% of your company, you can make $27.3 of profit. (This example is one-period type for simplicity. We'll see infinite-period type; DDM-model later. )<br />So, far OK?<br /><br /> (The end of part one) <br />Tokio<br />Tokionoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65335733049992845882012-10-29T03:56:13.626-04:002012-10-29T03:56:13.626-04:00Noah,
Welcome to the economists' spirit world...Noah,<br /><br />Welcome to the economists' spirit world. Just three points.<br /><br />1. The tax explanation is plain balderdash nonsense attempts to deify Caesar. Forget it is cuckoo.<br /><br />2. Paul Krugman solaces the labor theory of value. Not a bad idea except then there is the 'transformation' problem to deal with. That one is a multidimensional black hole with uncertain quantum tunneling.<br /><br />3. Since money has been in use for millennia, better to get with the times. For the last 640 years or so the dominant assessment has been the "qualities" of money. See Nicola Oresme, "de Monetas," c 1367, in english on webpdf. Consider the following 'qualities' as APT factors (aka fundamentals).<br /><br />1. Symbolic or Totem value = normally not much but can range upwards like George Best Ir 5 lb., Solidus of Julius Ceasar, Alexander Stater, and NZ Dumbledore dollar, each in its time, or downwards, like the US Susan B Anthony dollar, often mistakenly circulated as a quarter.<br /><br />2. Value in Exchange, Universal Equivalent, Numeraire. As anticipated. The bubble that expands or contracts, but never pops. Poor money for the poor, through either abrasion or interest. Read Walras about how value is then throw at Williamson. Krugman was referring to this as the "consensual" value. <br /><br />3. Unit of Account. The Ducat, Guilder, Pound, Dollar, Euro. Whatever your banker (not taxman) wants to see.<br /><br />4. Store of Value. Easy enough to say, but just as subject to Keynes' chapter 17 as any other impersonator. <br /><br />No money can possibly ever be perfect in any of its qualities. <br /><br />Money rules the roost; but if you need to ask why he will peck your eyes out for even trying to find out.<br /> <br />Obviously, dozens of books and hundreds of articles have been written about each word in the above outline. <br /><br />Money is the primary commodity.<br /><br />If you are ever asked what are its fundamentals just say, "everything else." Your inquisitor will either run away or just shut up and get down to work.<br />Best thing all around. Or, to quote the present Dalai Lama, "Money is that thing to best obtain wishes." <br />Now that I think of it, wishes wouldn't include knowledge. Clever fellow, that one.Ronald Calitrihttps://www.blogger.com/profile/07206853993777529429noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88373818939443319672012-10-27T17:36:58.388-04:002012-10-27T17:36:58.388-04:00YES.YES.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61989458820394559822012-10-27T16:57:36.157-04:002012-10-27T16:57:36.157-04:00From an investing point of view, the fundamental v...From an investing point of view, the fundamental value of an asset is the net present value of its future cash flows. Which is by definition subjective as nobody knows the future.<br /><br />But if you then say that money has no value it means that nothing has a fundamental value. For example if you buy a house to let it but the money the tenants pay has no value then than house has no value to you.<br /><br />Saying that money has no fundamental value is meaningless. It sounds smart but it's bullshit.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12016743670723626822012-10-27T07:38:12.211-04:002012-10-27T07:38:12.211-04:00@Thrustvectoring,
Currency has value for everyone...@Thrustvectoring,<br /><br />Currency has value for everyone required to pay taxes in that currency. That's the ultimate reason for taxation, to create a base level of demand and get your people to accept a form of money not backed by a store of wealth (like gold). Ben Johannsonnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59488744842450649922012-10-27T00:20:11.966-04:002012-10-27T00:20:11.966-04:00Eric,
Too true. I thought twice about including ...Eric,<br /><br />Too true. I thought twice about including creditors beside the shareholders in that sentence for the reasons you point out. But I figured there is always a chance that a debtor will default on some aspect of a loan, even when it becomes trivially easy to pay off the cash owed with valueless currency. This ought to give a loan a non-zero value, even as currency value approaches zero. Not an important distinction, I know... <br /><br />I hope it didn't distract you from all the exciting ideas in the remainder of my post! <br /><br />Cheers!<br /><br />RAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-13503345237529858832012-10-27T00:01:33.843-04:002012-10-27T00:01:33.843-04:00Anon,
I think you are completely right about the ...Anon,<br /><br />I think you are completely right about the non-existence of an asset of absolute "fundamental" worth, and in your interpretation of Paul K's point. <br /><br />Given that there is no absolute standard for fundamental value, the challenge is to determine whether there are certain assets that consistently tend to have more relative worth than others in various scenarios in the long run... <br /><br />Anthropological scrutiny of the differences between asset-types and mediums of exchange is definitely the route to take. I reckon such a study would identify some persistent trends. Gold and Silver have been richly valued (albeit by social convention) in every era and among nearly every culture (Thomas More's Utopians excepted!). Debased coins and fiat currencies tend to flop after a while (though they are indeed upheld by social convention during their glory days). The point here is that all socially-conventional ascriptions of value are not made equal. <br /><br />Paul K says that, unlike most asset bubbles, there is no logical inevitability which dictates that a "bubble" in fiat currency must eventually burst. We could go on believing in the value of this medium of exchange, founded only on expectation of others' belief in the value of this medium of exchange, indefinitely. Paul K might be right about this. If so, it marks an unprecedented turn in the pattern of history. <br /><br />You are totally right about economics needing to look beyond the traditional boundaries of the discipline to address some of these issues. <br /><br />Cheers!<br /><br />R<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72424341358420393762012-10-26T20:00:37.120-04:002012-10-26T20:00:37.120-04:00I'm sorry, but this is just word salad to me.....I'm sorry, but this is just word salad to me...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51181326842025493552012-10-26T17:43:39.109-04:002012-10-26T17:43:39.109-04:00This is one of those cases in which I think it cou...This is one of those cases in which I think it could benefit one field (in this case, economics) to actively solicit information from another field (in this case, anthropology). One of the key insights of anthropology is that there is almost nothing 'fundamental' in all of human behavior. Gold, silver and other precious metals have no 'fundamental value' - sometimes humans choose to imbue them with culturally-induced value, and sometimes we don't. ALL exchange, no matter the medium - fiat money, 'free' money, gold, goats, etc. - is a social convention. That's Paul K's point, and it's backed up by anthropology. Humans create media of agreed-upon exchange, because we need them, and they're all essentially made up (not innate or 'fundamental').Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91727559113676193372012-10-26T17:39:45.105-04:002012-10-26T17:39:45.105-04:00Noah, No you are not poor in communicating, but so...Noah, No you are not poor in communicating, but sometimes miscommunication does happen.<br /><br />By the way, just as an aside, I think you overrate the importance of definitions. People generally are able to communicate quite well based on an intuitive understanding of the terms that they are using. Definitions are only necessary when there are ambiguities that have to be excluded by a precise definition that clears up the potential ambiguity. That’s usually important in doing mathematical or logical proofs, but not that important otherwise. But that’s just an aside. <br /><br />You said:<br /><br />“1. The point of my post was to ask people (Steve Williamson in particular) to define the term "fundamental value".<br /><br />“2. You refused to define such a term.<br /><br />“3. You then claimed that, no matter how the term was defined, something with FV=0 could not function as a medium of exchange. This claim is clearly false. Suppose I define the term "fundamental value" to mean "net electrical charge". Why not? Words mean what we define them to mean. In that case, money would have zero fundamental value as long as it was electrically neutral.”<br /><br />I didn’t want to define “fundamental value” because I was focused on making the point that “fundamental value” doesn’t exist. (I misspoke when I called "fundamental value" a nonsense term.) That assertion, as you observe, itself requires that some implicit meaning be attached to the term, which I actually hinted at but did not state explicitly. So what I mean by “fundamental value” is a particular value such that if the market value deviates from that value, market forces will operate strongly to bring the market value back toward “fundamentaI value.” The reason that I deny that fundamental value in fact exists is that asset values depend on expectations and that expectations can be self-fulfilling, so there is no way to know whether deviations from a putative fundamental value will be self-reversing or self-fulfilling. I deny that fundamental values actually exist, but I can actually define (sort of) what I mean when I use the term. Concerning whether “words mean what we define them to mean,” there is a story about Abe Lincoln asking someone if we call a dog’s tail a leg, how many legs does a dog have. I always thought that Abe gave a good answer to that question. But again, that is just an aside.<br />David Glasnerhttp://www.uneasymoney.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45960432383321792432012-10-25T23:56:49.335-04:002012-10-25T23:56:49.335-04:00"By retaining a right to those hard assets, a..."By retaining a right to those hard assets, a shareholder or creditor has a property which would not be reduced to zero, even in the event that fiat currency implodes absolutely."<br /><br />Shareholders, yes. Creditors, no, unless the loan recipient fails to act in their own interest. If hyperinflation comes, there is no way I will be defaulting on my mortgage; I will simply sell any minor possession for a large quantity of worthless dollars and pay off my mortgage in full. My bank is not protected from the collapse of the value of a dollar, because they are only guaranteed to be able to get the minimum of the value of my house or the money I have promised to pay; if I pay, they have no claim on my house. Eric Lhttps://www.blogger.com/profile/17688525347746547529noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-49140452243558033062012-10-25T22:58:26.764-04:002012-10-25T22:58:26.764-04:00Noah:
I support the clamor in opposition to your...Noah: <br /><br />I support the clamor in opposition to your point that if fiat money has zero value most financial assets must also have zero value:<br /><br />Firms are more than money machines; they are entities which control hard assets. By retaining a right to those hard assets, a shareholder or creditor has a property which would not be reduced to zero, even in the event that fiat currency implodes absolutely. As long as the law of property and contract stands, a stock or a bond has a fundamental value which can be measured in things. Numerous cases in history exist when a fiat currency imploded but many local firms survived, rapidly switching dividends and operations to value-laden alternative currencies. <br /><br />US Dollars were once a kind of promissory note, a contract which held a definite value measured in gold. Holders of Dollars, like owners of equity, had a claim on a tangible asset as long as the law of contracts was upheld. Since the severing of the US gold standard, Dollars can no longer be considered contracts/securities/promissory-notes. While we can imagine government doing much to support the fiat dollar's ongoing value in day-to-day exchange, no one has a contractual duty to give us anything for our dollars. <br /><br />============<br /><br />Regarding your larger question about a concrete basis for measuring "fundamental value," I reckon that we ought to do like the philosophers and begin from a viewpoint of calamity. <br /><br />Imagine (or historically review) cases of partial or absolute collapse in currency systems, in law and order, or in civilization. What types of assets hold value in the various scenarios?<br /><br />The necessaries of life invariably hold fundamental value: food, tools, arms, animals, etc.. Notably, objects which are scarce, light, beautiful, useful, non-spoilable, divisible and re-fusible, such as metals, tend to hold their value well. These objects are peculiarly suited to emerge as mediums of exchange. <br /><br />In some cases, land titles are a fantastic measure of fundamental value -- land having an inherent capacity to produce the necessaries of life. In other cases, land titles become worthless, as an entire legal regime is deposed. <br /><br />I like to look to Homer when attempting to grasp the measure of things: golden cups, elegant arms, heads of cattle, casks of wine and oil, an estate that you can defend, the loyalty of strong and honest men, and the favor of the gods -- these are the things that hold value in every age.<br /><br />Unfortunately, my Homeric stores of value have no measurable absolute value, but rather fluctuate in relative worth depending on circumstance and preference. A measure of true fundamental value is and will always be as elusive as human taste. This is not to say it does not exist in absolute terms, only that math-loving economists will never find a way to capture it for use as a cornerstone to our reductionist theories. If we must find a measurable thing to serve as a cornerstone of fundamental value upon which to build a necessarily imprecise economics, gold has always been the best measure by far. All fiat currency is destined to burst in the long run. It always has. <br /><br />Forgive my lengthy and somewhat rantish reply.<br /><br />===============<br /><br />Fun Post!<br /><br />--RyanAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61457709133225256342012-10-25T14:22:33.214-04:002012-10-25T14:22:33.214-04:00This is a bit confusing. If you are selling someth...<i>This is a bit confusing. If you are selling something with positive value (a toaster) why would you accept something in exchange that you expect to have zero value?</i><br /><br />You would not, and that was my point. <br /><br />Am I just poor at communicating?<br /><br /><i>You asked me rephrase my question. Okay, here it goes: If something is worthless, how can it function as a medium of exchange?</i><br /><br />And my answer is: It depends on what "worthless" means. If something has <i>no worth to anyone</i>, it obviously cannot function as a medium of exchange.<br /><br /><i>The answer, based on your answer to the previous (rephrased) question would seem to be</i><br /><br />Oh no, now you're gonna go get yourself in trouble!!<br /><br /><i>it can only serve as a medium of exchange when at least one party to the transaction is mistaken about its value.</i><br /><br />Wow, I am just an amazingly poor communicator!<br /><br />No, I don't think that at all. That is absurd.<br /><br /><i>When I say that I don’t think that “fundamental value” is a meaningful concept, I mean that I don’t think it’s possible to identify a particular value for an asset as being somehow more true or valid than other values in the sense that deviations from that value cannot persist over time. Here I am saying that, as a matter of logic, even if I accepted, for argument’s sake, that there is such a thing as the fundamental value of a medium of exchange, that fundamental value could not be zero. It could not be zero, because for a medium of exchange to be worthless would deprive it of the capacity to function as a medium of exchange. Of course you would say that a fundamentally worthless asset could still function as a medium of exchange because a lot people mistakenly believe that it is not worthless. But then how can you conclude that stocks are fundamentally worthless? Maybe they are fundamentally valuable; it's just that people mistakenly think the money is valuable and hold stocks even though stocks are just claims on money.</i><br /><br />OK, there's a lot of verbiage here, and a hailstorm of terms that are not carefully defined. Let me see if I can parse some of this.<br /><br />1. The point of my post was to ask people (Steve Williamson in particular) to define the term "fundamental value".<br /><br />2. You refused to define such a term.<br /><br />3. You then claimed that, no matter <i>how</i> the term was defined, something with FV=0 could not function as a medium of exchange. This claim is clearly false. Suppose I define the term "fundamental value" to mean "net electrical charge". Why not? Words mean what we define them to mean. In that case, money would have zero fundamental value as long as it was electrically neutral.<br /><br />So this statement of yours - <i>"even if I accepted, for argument’s sake, that there is such a thing as the fundamental value of a medium of exchange, that fundamental value could not be zero"</i> - is wrong and false. Without defining a term, you cannot make statements about that term.<br /><br />So, again, unless you agree to a definition of "fundamental value", we can't discuss what does and does not have fundamental value.<br /><br />Does that clear things up a bit?Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29863837514305575612012-10-24T22:54:07.813-04:002012-10-24T22:54:07.813-04:00Noah, You are right. It was inappropriate for me ...Noah, You are right. It was inappropriate for me to use that accusatory tone in posing my questions to you. Thanks for rephrasing the question and answering it anyway.<br /><br />You answered the rephrased question (“Do you believe that something with zero value cannot be exchanged for something with positive value, and why or why not?”) as follows:<br /><br />“It depends on what one means by "value". If "value" means "ex post value", then it's possible for such an exchange to take place; for example, I might buy a toaster that turns out to be faulty.<br /><br />“If "value" means "expected value to the seller", then it also seems possible, as I would definitely be willing to exchange something I didn't value for something I did value.<br /><br />“If "value" means "expected value to the buyer", then definitionally, it would seem that such an exchange is not possible.”<br /><br />This is a bit confusing. If you are selling something with positive value (a toaster) why would you accept something in exchange that you expect to have zero value? If you are buying a toaster, and you expect money to have zero value, then for sure you will be prepared to give up the money for the toaster. So don’t you have it backwards?<br /><br />You asked me rephrase my question. Okay, here it goes: If something is worthless, how can it function as a medium of exchange? The answer, based on your answer to the previous (rephrased) question would seem to be, it can only serve as a medium of exchange when at least one party to the transaction is mistaken about its value. Wouldn't that mean that, according to you, stocks have a positive fundamental value? It's just that some people hold stocks because they mistakenly think that money has positive value.<br /><br />You said:<br /><br />“It's weird that you make this claim about real-world fundamental values after saying that you don't even like to define "fundamental value". How can you make statements about the real-world behavior of a quantity that you explicitly refuse to even define? That makes no sense to me.“ <br /><br />When I say that I don’t think that “fundamental value” is a meaningful concept, I mean that I don’t think it’s possible to identify a particular value for an asset as being somehow more true or valid than other values in the sense that deviations from that value cannot persist over time. Here I am saying that, as a matter of logic, even if I accepted, for argument’s sake, that there is such a thing as the fundamental value of a medium of exchange, that fundamental value could not be zero. It could not be zero, because for a medium of exchange to be worthless would deprive it of the capacity to function as a medium of exchange. Of course you would say that a fundamentally worthless asset could still function as a medium of exchange because a lot people mistakenly believe that it is not worthless. But then how can you conclude that stocks are fundamentally worthless? Maybe they are fundamentally valuable; it's just that people mistakenly think the money is valuable and hold stocks even though stocks are just claims on money.David Glasnerhttp://www.uneasymoney.comnoreply@blogger.com