Sunday, March 11, 2012

Savings & Capital Theory Open Forum


The monetary plane is only relevant insofar as it directs and facilitates the flow of the physical plane. Part of what pisses people off so much about the $IMFS is that it seems to direct and facilitate the flow of massive amounts of cool physical plane stuff into the hands of those who contribute little more than tweaking the monetary plane in their favor. But we must remember that they are not producing the stuff that they are enjoying. They are simply receiving it.

It is the physical plane that drives the flow. It is the producers that produce the stuff. And it is the net-producers that produce enough extra stuff that it can accumulate in the possession of the monetary plane managers. It is the savers that drive the economy. Savers are net-producers. Net-producers are savers.

I have another big idea post that I'm working on, but I'm finding it difficult to make progress because the stunning revelation I am trying to share with you rests on so many complicated foundations. Without giving too much away, I guess I could say it will be a continuation of some of the themes introduced in Moneyness. So I had this idea that I could dispense with some of my difficulty by just putting a little bit here in an open forum.

Recall the story of "I, Pencil" from the Superorganism Open Forum. The Austrian's taught us that "capital" is not merely a lump of some homogeneous substance. It is a complex structure of various goods used in specific combinations to produce other goods. Capital, in essence, is a product of the Superorganism. All else is simply unsustainable malinvestment. How long managed malinvestment can continue before the whole superstructure collapses seems to be the only real question.

Rather than getting into who should be making the decisions that lead to capital formation and economic growth in the physical plane, I'm more interested in how relevant the $IMFS is to that process at this point. Does the $IMFS transmit any price information that is relevant to the Superorganism anymore? The Superorganism is a robust creature. It can work around a badly mismanaged superstructure and still produce marvelous creations. But there comes a point when the signals transmitted by the system become so detrimental to the Superorganism's natural drive toward sustainability that it must be abandoned for good.

One of the flaws of the $IMFS is that it does view "capital" as a homogeneous lump. And because it is a monetary system managed by net-consumers, it attempts to redirect all capital to the consumption end of the spectrum, where it (the $IMFS) feeds. When you first start this process of capital consumption, everything is really nice. Imagine that you decided to quit work tomorrow and start liquidating your gold to your heart's content. You could live high on the hog for a while! This is the $IMFS. But if you think it through for a minute, you'll realize that the better life is each day, the sooner you'll run out of gold.

Savers drive the economy, and the $IMFS consumes it. And what of investment? The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods. The concepts I hope you'll think about and discuss in the comments are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane only exists to assist the Superorganism by transmitting information through prices and lubricating the flow. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse.

Below is an excerpt from Freegold Foundations discussing capital and savings. Sorry about the length of the excerpt, but if you don't like long posts, you're probably at the wrong blog. After that I'll end this post with a neat little island analogy on the topic of capital consumption, or how to kill an economy in style. Everybody loves island analogies, right?

Freegold Foundations

Capital

I'm not going to go into great detail on the concept of capital, other than to give you a mental exercise. Because the term "capital" can be quite confusing in our modern paper/electronic world, I want you to imagine a much simpler human civilization. Imagine an ancient Greek city. All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man's intellect were the capital of the time.

Now imagine the destruction of capital. Imagine an earthquake or volcano that destroys the fruits of many generations. Or a plague or war, perhaps, that destroys the knowledge base. That's the loss of real wealth you are imagining. And it is this cycle of capital creation and destruction that tells the story of mankind throughout many civilizations.

In modern economics, the word "capital" accounts for many specific things. But I think it is helpful to consider this word in a more basic, fundamental way. Think of it in terms of capital creation, capital employment and capital consumption or destruction. Modern economics would not call consumables capital, which is why I am suggesting a different approach to the word. When we are productive, imagine we are creating this thing called capital. We may figure out a way to turn someone else's capital, combined with our own prowess, into more capital. This would be the employment of capital. And sometimes we simply consume it, or use it up.

If I build a house I have created capital. By owning and living in a home, I am consuming that capital slowly. If I were to buy a specialized tool and use it to make something new, then I have employed capital to create more capital. Is this view of "capital" clear, or woolly?

Savings

Savings are the result of one's production being greater than his consumption. Saving is the convention for deferring the fruits of capital creation—earned consumption—until later. Savings is also the way we hand off capital to the next person who will use it to create more capital. And when it is done right, saving results in the accumulation of capital throughout society at large. When it is done poorly, saving results in the aggregate destruction of capital through frivolous consumption and mal(bad)investment (the misguided employment of capital) resulting in unsustainable infrastructures built on unstable levered foundations.

Here's where it may get a bit counterintuitive. You might, if you were Charlie Munger, think that the best way to pass your earned capital on to another producer is through paper. If you save in paper notes then you are loaning your earned capital to the next producer in line, right? And if you buy gold Charlie says you're a jerk, even if it works, because he thinks you are pulling capital out of the system. But are you really? I bring this up (and please watch a minute or so of that video starting at 1:04:05) because it is the key to this discussion about savings.

We should think about the global economy in terms of production and consumption in the physical realm as opposed to the financial or monetary realm, what I like to call the physical plane versus the monetary plane. A "net producer" produces more capital than he consumes. Likewise, a "net consumer" consumes more than he produces. The global aggregate is generally net-neutral on this production-consumption continuum. I say "generally" because there are times of expansion and times of contraction, so taking time into account, we are "generally" net-neutral (or close to it) as a planet. At least that's the way it is under the global dollar reserve standard.

On the national scale, however, we are all both blessed and cursed by the presence of government. Governments are always net consumers, as it is their very job to redistribute part of our private savings into the infrastructure and secure environment that enables us to produce capital in the way that we do. Government's job is not to produce capital, but to enable and support the private production (and accumulation) of capital!

Being such that human society has evolved in this way, we private citizens must, in aggregate, be net producers so that government can net consume. And we become net producers by saving. Therefore we enable and support our own future net productivity by saving some of our past production of capital today, in the form of savings.

The financial system is really just the monetary plane's record-keeper of this vital process that actually takes place on the physical plane. In its modern incarnation, the global financial system has allowed for a strange international balancing act whereby (literally) one whole side of the planet's net production has allowed the other side to net-consume for decades on end. But this is an unsustainable anomaly, and it is beside the point of this discussion. So please push this giant, global imbalance-elephant in the room over to the corner while we continue this discussion about savings.

The question we must answer here is: Is Charlie Munger right? Are you a good person only if you put your savings into paper where it can be easily redistributed, and a jerk if you buy gold, depriving the paper whores of your savings? Is this the way it works in reality? Or is this simply the sales pitch of one with great bets riding on the continued popularity of paper savings?

The government confiscates a portion of the physical capital created in the private sector through several means. Taxation is one way, forcing you to keep a portion of your earnings in paper so that it can be easily transferred to the government and then used to buy up capital from the marketplace. This forces you to leave some of your production in the marketplace to be taken by the government, preventing you from consuming an amount equal to your productive output.

Printing money, or its modern equivalent, quantitative easing, is another way the government can confiscate real capital from the marketplace without first producing a commensurate amount. This method inflicts what we call "the inflation tax." The "victims" of this confiscation are anyone and everyone holding (and saving) the currency or any paper asset fixed to it, and the damages are relative to the amount of currency each "victim" is holding. Because this form of confiscation is spread so wide and thin, it is mostly not even noticed by the private sector.

The last way the government confiscates capital is by borrowing it directly from the net producers in the private sector. When you buy US bonds, it is you that are loaning your earned claims on capital to the government. So we can see that the government has plenty of ways to create its own claims on capital in the marketplace without first producing a commensurate market contribution (because governments are always net consumers).

In fact, the modern financial system has bestowed these same powers, creating market claims without contribution, upon the private sector as well. I'm not talking about private banks loaning money into existence, for this process has no market contribution from which to feed. It is directly price inflationary until the debtor makes a market contribution to work it off.

What I'm talking about is the private sector's ability to sell unlimited amounts of this debt to the savers, funding the marketplace claims to consumers/debtors with real marketplace capital (contributed by the savers). Private banks that would normally be constrained by their balance sheets for their own survival can now offload that constraint onto the net producers, making themselves—the banks—totally unconstrained.

The banking system sells all kinds of packaged debt to net producers, the savers. It creates this stuff at will to meet demand. And if necessary, it drums up new debtors one way or another to keep this stuff financially funded. Even corporations can dilute their paper shares to take in new claims from the savers without giving up a commensurate marketplace contribution.

This is the process of paper savings hyperinflation. It is a self-feeding, self-fulfilling, self-sustaining, self-propelling system that will ultimately lead to real price hyperinflation. When you produce capital and decide to leave it in the marketplace, postponing your earned consumption until later, and you do so in any paper investment, you are feeding this process of capital destruction through paper savings hyperinflation.

If you buy government debt you are feeding, enabling the growth of government beyond its most basic mandate, providing the infrastructure and secure environment that enables us to produce capital. And if you think an expanding government is good, just beware that all governments are stupid!

"The institution of government was invented to escape the burden of being smart. Its fundamental purpose is to take money by force to evade the market's guidance to have the privilege of being stupid." Richard Maybury goes on (in the linked video) to say that private organizations that petition government for special protections, subsidies and incentives are asking for the same privilege. They want to be relieved of the burden of being smart.

(Not since the Agriculture Adjustment Act of 1933 that paid farmers to destroy crops during the Great Depression in an attempt to raise the price of crops, has there been a more obvious example of government's propensity for destroying real world capital than the 2009 "Cash for Clunkers" program, whereby government literally paid private car dealerships to pour sugar into running car engines ensuring their permanent destruction.)

This is why, when you save in government paper, you are enabling malinvestment and the destruction of capital that goes along with it. And it's the destruction of the capital that you just contributed to the marketplace that you are feeding. The same goes for the private sector. When you save in private paper you are enabling the expansion of frivolous consumption (beyond natural market constraint) and the destruction of your capital contribution to the marketplace that goes along with it.

So what's the alternative? If both public and private paper savings contribute to the expansion of malinvestment, net-consumption and systemic capital destruction, what is a net producer to do? If one wants to produce more capital than he consumes—for the good of the economy—yet he doesn't want to work for free, what is he to do? Or if one wants to produce more than she consumes—for the good of her retirement years and her family's future—what is she to do?

The monetary plane, the modern dollar-based global financial system, has failed these individuals. So what is left? The physical plane? If these individuals trade their earned marketplace credits in for physical capital without employing that capital in productive enterprise, then they are either consuming that capital (capital destruction) or denying other producers the use of it (hoarding, also destructive to the capital creation process). This is not only detrimental to society at large, but also to the future value of your savings that depends on new capital being plentiful in the marketplace when you deploy your savings in the future.

But of course there is one item, one physical asset, that stands out above all the rest. And this isn't some new discovery by FOFOA. Man discovered that this was gold's highest and best use thousands of years ago. Once you've produced capital for the marketplace, whatever asset class you choose to deploy your earned credits into will feel the economic pressure to rise in price. If the monetary plane was volume-fixed (or even constrained), it too would rise in price as real capital is added to the economy. But it has become a system that expands in volume rather than rising in price.

This is hyperinflation: quantitative expansion of savings! If the pool of savings rose only in value and not quantity, then each new net producer would have to bid "savings" away from an old net producer, and "savings" would retain their proper relationship to the pool of real marketplace capital available for purchase.

If you choose to deploy your credits into the everyday physical plane, the tangible goods plane, prices will rise. If all the savers chose oil for example, we'd all pay very high prices at the gas pump. Or choose agriculture for your savings and we'll all have to work an extra hour to feed ourselves. No, you want to choose something that both rises in price (rather than expanding in volume) and also something that does not infringe on others or economically impede the capital creation process that feeds value to your savings. And as an added bonus, if everyone chooses the same thing, it works extra well. This is called the focal point.

But for gold to fulfill this vital function in the capital creation process, it needs to trade in a fixed (or at least constrained) quantity that will allow its price to rise every time a new capital net-increase is contributed to the marketplace. And, unfortunately, paper gold and fractional reserve bullion banking doesn't allow this process to work properly. In fact, it makes paper appear generally competitive, even to gold.

So what about Charlie Munger? Is he right? Are you a jerk if you buy gold? Well, yes and no. If he's talking about paper gold, then yes! But likewise, it seems you are a jerk if you buy Charlie's paper as well! And you're an even bigger jerk if you buy physical commodities and tangible goods without the intention of employing them in real economic activity. It seems—and correct me if I'm wrong here—that physical gold (along with a few other discreet collectible items like real estate, fine art, antique furniture, ancient artifacts, fine gemstones, fine jewelry and rare classic cars) may be the only true wealth holdings in which you are not a jerk. What do you think?

________________________________________________________

And finally, here is a fun little excerpt from Robert P. Murphy's 2008 article, The Importance of Capital Theory:

A Sushi Model of Capital Consumption


Above I've pointed out some of the basic flaws in Krugman's and Cowen's arguments. (Other Austrians have responded to Krugman in the past. See the replies of Garrison and Cochran.) More generally, they are ignoring the all-important notion of capital consumption. This is why one needs to understand capital theory, as pioneered by Carl Menger and Eugen von Böhm-Bawerk, in order to make sense of what the heck just happened in the US economy. Any talking head on CNBC who doesn't understand capital consumption is going to give horrible policy recommendations.

When thinking about this article, I went back and forth. I have decided that I should spell out a "model" of intermediate complexity, because if I simplify it too much, it might not really click with the reader, but if I go overboard with it, no one in his right mind would finish the article. Without further ado, let's examine a hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi.

The island starts in an initial equilibrium that is indefinitely sustainable. Every day, 25 people row boats out into the water and use nets to catch fish. Another 25 of the islanders go into the paddies to gather rice. Yet another 25 people take rice and fish (collected during the previous day, of course) and make tantalizing sushi rolls. Finally, the remaining 25 of the islanders devote their days to upkeep of the boats and nets. In this way, every day there are a total of (let us say) 500 sushi rolls produced, allowing each islander to eat 5 sushi rolls per day, day in and day out. Not a bad life, really, especially when you consider the ocean view and the absence of Jim Cramer.



But alas, one day Paul Krugman washes onto the beach. After being revived, he surveys the humble economy and starts advising the islanders on how to raise their standard of living to American levels. He shows them the outboard motor (still full of gas) from his shipwreck, and they are intrigued. Being untrained in economics, they find his arguments irresistible and agree to follow his recommendations.

Therefore, the original, sustainable deployment of island workers is altered. Under Krugman's plan for prosperity, 30 islanders take the boats (one with a motor) and nets out to catch fish. Another 30 gather rice from the paddies. A third 30 use the fish and rice to make sushi rolls. In a new twist, 5 of the islanders scour the island for materials necessary to maintain the motor; after all, every day it burns gasoline, and its oil gets dirtier. But of course, all of this only leaves 5 islanders remaining to maintain the boats and nets, which they continue to do every day. (If the reader is curious, Krugman doesn't work in sushi production. He spends his days in a hammock, penning essays that blame the islanders' poverty on the stinginess of the coconut trees.)

For a few months, the islanders are convinced that the pale-faced Nobel laureate is a genius. Every day, 606 sushi rolls are produced, meaning that everyone (including Krugman) gets to eat 6 rolls per day, instead of the 5 rolls per day to which they had been accustomed. The islanders believe this increase is due to use of the motor, but really it's mostly due to the rearrangement of tasks. Before, only 25 people were devoted to fishing, rice collection, and sushi preparation. But now, 30 people are devoted to each of these areas. So even without the motor, total daily output of sushi would have increased by 20%, assuming the islanders were equally good at the various jobs, and that there were plenty of fish and rice provided by nature. (In fact, the contribution of the motor was really only the extra 6 rolls necessary to feed Krugman.)

But alas, eventually the reduction in boat and net maintenance begins to affect output. With only 5 islanders devoted to this task, instead of the original 25, something has to give. The nets become more and more frayed over time, and the boats develop small leaks. This means that the 30 fishermen don't return each day with as many fish, because their equipment isn't as good as it used to be. The 30 islanders making sushi are then in a fix, because they now have an imbalance between rice and fish. They start cheating, by putting in smaller pieces of fish into each roll. The islanders continue to get 6 rolls per day, but now each roll has less fish in it. The islanders are furious — except for those who are repulsed by the idea of ingesting raw fish.

Being a trained economist, Krugman knows what to do. He suggests that 2 of the rice workers and 2 of the sushi rollers switch over to help the fishermen. Now with 34 workers, the islanders are able to catch almost as many fish per day as they were in the previous months, even though they are now using tattered nets and dilapidated boats. Krugman — being very sharp with numbers — moved just enough workers so that the fish caught by the 34 islanders matches up perfectly with the rice picked by the remaining 28 islanders who go to the paddies every day. With this amount of fish and rice, the 28 workers in the rolling occupation are able to produce 556 sushi rolls per day. This allows everyone to consume about 5 and a half rolls per day, with a bonus roll left over for Krugman.

The islanders are a bit concerned. When they first followed Krugman's advice, their consumption jumped from 5 rolls to 6 per day. Then when things seemed to be all screwed up, Krugman managed to fix the worst of the discoordination, but still, consumption fell to 5.5 rolls per day. Krugman reminded them that 5.5 was better than 5. He finally got the crowd to disperse by talking about "Cobb-Douglas production functions" and drawing IS-LM curves in the sand.

Because this is a family-friendly website, we will stop our story here. Needless to say, at some point the 5 islanders devoted to net and boat production will decide that they have to cut their losses. Rather than trying to maintain the original fleet of boats and original collection of nets with only 5 workers instead of 25, they will instead focus their efforts on the best 20% of the boats and nets, and keep them in great shape. At that point, it will be physically impossible for the islanders to prop up their daily sushi output. In order just to return to their original, sustainable level of 5 sushi rolls per person per day, the islanders will need to suffer a period of privation where many of them are devoted to net and boat production. (We can only hope that Professor Krugman has been rescued by the Swedes by this time.)

The 5 people looking for ways to synthesize gasoline and motor oil will have to abandon that task, because it was never appropriate for the islanders' primitive capital structure. The islanders will of course discard the motor brought to the island by Krugman once it runs out of gas.

Finally, we predict that during the period of transition, some islanders will have nothing to do. After all, there will already be the maximum needed for catching fish with the usable boats and nets, and there will already be the corresponding number of islanders devoted to rice collection and sushi rolling, given the small daily catch of fish. There would be no point in adding extra islanders to boat and net production, because then they would end up building more than could be sustained in the long run. Hence, the elders rotate 10 people every day, who are allowed to goof off. They could of course go try to catch fish with their bare hands, or go gather rice that would just be eaten in piles by itself, but everyone decides that this is a waste of time. Given the realities, it is decided that during the transition, 10 people get the day off, even though everyone is hungry. That is just how bad Krugman's advice was.

Conclusion

As our simple story illustrates, in modern economies workers use capital goods to augment their labor as they transform nature's gifts into consumption goods. Because of the time structure of production, it is possible to temporarily boost everyone's consumption, but only at the expense of maintaining the capital goods (the boats and nets), which are thus "consumed." At some point, engineering reality sets in, and no "stimulus" policies can prevent a sharp drop in consumption.

Although the story of the sushi economy was simplistic, I hope that it illustrated essential features of a boom-bust cycle. When the islanders first implement Krugman's advice, they all feel richer. After all, they really are eating 6 rolls per day instead of 5; there is no arguing with results. And they would have no reason to suspect an unsustainable restructuring, either: after all, they are using a new outboard motor. This is analogous to the arguments about the "New Economy" during the dot-com boom, or the confidence placed in the new financial instruments used during the housing boom. During every boom, people can always come up with reasons that "this time it's different."

In the sushi economy, this initial prosperity was illusory. Although there were indeed benefits from the new technology, the bulk of the extra consumption was being financed through capital consumption, i.e., by allowing the boats and nets to deteriorate. This is analogous to Americans' consuming a massive amount of imported consumption goods during the housing boom, because they erroneously thought their rising house values would more than compensate. In other words, had Americans realized that their real-estate holdings would plummet in a few years, they would not have consumed nearly as much. They were consuming capital without realizing it, just as the islanders didn't realize that their extra sushi consumption was largely financed through neglect of their boats and nets.

Note too that this aspect of the story answers Cowen's objection: people consume more during the boom — i.e., the villagers eat more sushi per day — even while new, unsustainable investment projects are started. (In our sushi economy, the unsustainable project was looking for gasoline for the newfangled outboard motor.) Cowen is right that a sustainable lengthening of the capital structure initially requires a reduction in consumption; what happens is investors abstain and plow their savings into the new projects. But during a central-bank-induced boom, there hasn't been real savings to fund the new investments. That's why the boom is unsustainable, but it also explains why consumption increases at the same time. It's true that this is impossible in the long run, but in the short run it is possible to increase investment in new projects, and to increase consumption at the same time. What you do is neglect maintenance on critical intermediate goods, just as our islanders were able to pull off the feat for a few months. A modern economy is very complex, and it can take a few years for an unsustainable structure to become recognized as such.

Finally, our sushi economy showed why unemployment increases during the retrenchment. People don't like to work; they would rather lounge around. In order for it be worthwhile to give up leisure, the payoffs from labor have to be high enough. During the "recession" period, when the islanders had to cut way back on output from the fish, rice, and sushi-roll "sectors," there weren't 100 different tasks worth doing. In our story, we stipulated that only 90 people could be usefully integrated into the production structure, at least until the fleet of boats and supply of nets start getting restored, allowing more of the "unemployed" islanders to once again have something useful to do.

In the real world, this also happens: during the recession following the artificial boom period, resources need to get rearranged; certain projects need to be abandoned (like hunting for gasoline in the sushi economy); and critical intermediate goods (like boats and nets) need to be replenished since they were ignored during the boom. It takes time for all of the million-and-one different types of materials, tools, and equipment to be furnished in order to resume normal growth. During that transition, the contribution of the labor of some people is so low that it's not worth it to hire them (especially with minimum-wage laws and other regulations).

The elementary flaw in Krugman's objection is that he is ignoring the time structure of production. When workers get laid off in the industries that produce investment goods, they can't simply switch over to cranking out TVs and steak dinners. This is because the production of TVs and steak dinners relies on capital goods that must have already been produced. In our sushi economy, the unemployed islanders couldn't jump into sushi rolling, because there weren't yet enough fish being produced. And they couldn't jump into fish production, because there weren't enough boats and nets to make their efforts worthwhile. And finally, they couldn't jump into boat and net production, because there were already enough islanders working in that area to restore the fleet and collection of nets back to their long-run sustainable level.

People in grad school would sometimes ask me why I bothered with an "obsolete" school of thought. I didn't bother citing subjectivism, monetary theory, or even entrepreneurship, though those are all areas where the Austrian school is superior to the neoclassical mainstream. Nope, I would always say, "Their capital theory and business-cycle theory are the best I have found." Our current economic crisis — and the fact that Nobel laureates don't even understand what is happening — shows that I chose wisely.

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Just a reminder, the concepts up for discussion are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane exists only to assist the Superorganism in its drive toward sustainability by transmitting information through prices and lubricating the flow of the physical. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. Savers drive the economy, the Superorganism organizes it, and the $IMFS kills it softly.

Sincerely,
FOFOA

225 comments:

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Nickelsaver said...

Bjorn & Julian

Julian. It may well be that you have a lot to learn. We all do! But I feel that you have come a long way towards (quite beautifully) answering your own question regarding how saving expands the economy. I would however like to make a small addition.

"Is it the forwarding of the excess production to another, whom had over time saved their own excess “capital” represented in the form of gold? The forwarding and retrieving are one act from two parties' perspectives. The cycle of savers passing savings on to savers-turned-spenders (or investors!), the flow of the store of value medium."

The way I see it, investing in productive entreprises expands the economy, not the act of saving per se. But there can be no investment without savings. And without a sound information transmitting mechanism, the superorganism will end up with a lot of investment that turns out to not be productive, wasting savings and make less savings available for productive entreprise.

And as to why saving in gold is superior to any other form of saving, well that is a topic that deserves several multi page posts, or even a book or two worth of text. Thankfully, FOFOA has already done that.

Being one who has much to learn, let me share my thought process upon reading this.

It occurs to me that one could classify these things; savings/capital/investments/spending into several different categories.

We could look at these things from purely the physical plane (physics). To do so, I find no better starting place than the ""Laws of Thermodynamics" focusing in on the portion of the first law The Conservation of Energy.

To keep this simple, we could say that all things are made up of a combination of mass and energy. And we know from these laws that energy (and matter) cannot be created or destroyed. It merely changes state, or is convertible.

So then, from the perspective of consumption, we could form groups based on how these things behave in conjunction with these laws:

Easily Convertible - Food, Wood, etc
Moderately Convertible - Steel, Plastic, etc
Hardly Convertible - Gold, Silver, etc

Thus, we can see that these things savings/capital/investments/spending ultimately classify themselves (in the physical realm) according to there convertibility.

Capital could be any combination of the above, taking time into account, so that the easily convertible are converted (invested or spent) efficiently.

One could attempt to save in sushi, but easily convertible materials are constrained by time, and so the selection of a savings medium is crucial.

As to why gold constitutes the best savings medium, a study of its physical properties gives us a great starting point for the argument.

AdvocatusDiaboli said...

FOFOA,
Why dont you add between the monetary plane and the physical plane also a new additional "human plane".
Because amazingly this element is in most modells completely missing. Having only the MP & PP, the system should be deterministic. But it is not, there is defintely a third plane. The humans are really a special breed of there own. They can both be influenced by either the physical but as well as the monetary plane or both at the same time.
e.g. Having a paradise island with lots of coco nuts, the humans will never start to work, stiring the monetary plane aroung will not effect the development of the physical.
Or if you let them give their products away for free (or for green toilett paper), human can become really busy to work even more...
Greets, AD

Nickelsaver said...

AD,

The humans are the ones looking at the model.

Nickelsaver said...

http://en.wikipedia.org/wiki/File:Intersecting_planes.svg

Humans exist in the physical plane, and interact with the monetary plane.

AdvocatusDiaboli said...

NS,

I know you have difficulties, accepting wisedom from mine. Let's read some FOFOA, yes?

"Capital, in essence, is a product of the Superorganism. All else is simply unsustainable malinvestment."
...
"All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man's intellect were the capital of the time."

nope, no humans found...except maybe some special breeded superstrong mindless slaves on a cotton plantation (those might be considered capital/things as well). So: free will humans are NOT capital (in terms of being included in the physical plane). They are the co-drivers, besides mother nature, of the physical plane, true, they are physical but not the same physical plane of "things" themself, IMHO.
Greets, AD

Nickelsaver said...

AD,

I'll try to make this quick because I must be away from the computer for awhile.

I actually am finding value in your contributions, as they cause me to think and serve to solidify my understanding. Although, I do not believe that I would classify them as "wisedom"

Your assertion that an addition plane is required reveals either a lack of understanding, or a lack of intellectual honesty.

The "Superorganism" is the sum total of the humans and there existence within the PP, and interaction with the MP.

The absence of the operational function of the humans, the "Superorganism", within a model, does not constitute a missing plane, but the limits of the model.

You can merely expand the model to accommodate the finite functions of the humans as they relate to the PP and MP.

And as you do so, the closer to reality your model becomes, the less it represents a model in favor of an actual description of reality.

Greets :-)

dragonfly said...

off topic, but just checked in on the ECB balance sheet, and sure enough, gold is 65 percent of reserves, while foreign currencies are a mere 22.7 percent.

http://www.ecb.int/stats/external/reserves/templates/html/201201eur.en.html

burningfiat said...

AD,

Now it is getting philosophical, right. Humans: Mind or matter?

Know thyself - get you some

It will probably require some Mindfulness. Don't overdo the introspection though. You might find out stuff like work, money, society and even gold is not really needed :-)

/Burning

AdvocatusDiaboli said...

Sorry, but I didnt intend to confuse or dilute anything, just pointing out.

Okay there are also philosophical matters about that, so once in a while you can fall of the edge into nihilism.

But besides philosphical matters, just think of a much more easier practical example: The main task of the FED is to avoid unemployment.....hmmm...I dont know good? bad?....let's look at Spain in the meantime:
>50% young unemployment (just imagine the social consequences in maybe five to ten years), but still plenty of started constructions not finished and people loosing their homes. Why? Because of the monetary plane? Does that sound reasonable for the physical plane overall? Who knows...
I know above examples smells like freegold is a solution for the Spainish, anyway printing to infinity, since the gold holders are protected also does not sound like a good idea, because that way they will never stop building.
Greets, AD

julian said...

malinvestment is a form of consumption

the opportunity costs are eaten away

time structure of nature has generation and destruction

laws of thermodynamic energy say that is change of state, but the energy itself doesn't extinguish, although its form/state might no longer allow us humans to access it for capital enterprise

spending/investment/malinvestment appear very similar in nature

similar action (capital is employed into the market)

the purpose/aim/objective/goal (intent) (incentive?) of the action and the results determine what we would call it, spending/investment/malinvestment

the economy is a built up set of value, in the form of what we call capital

that includes the humans and their knowledge and skill

in essence this is a study of human economy, not dolphin economy (the lines between natural biological social order and economy are thin) or some other primate economy...we speak of human involvement in the world

the ideation
the invention/design
the creation
the replication
the repetition over time, within the time structure of human life and generations and evolution (improvements on previous creations or skills or abilities - also drawing on new ones to then improve)

this doesn't escape the religious history of humankind
money and human power are as old as?...well, not as old as human power and the economic social order through production of life support for communities of humans - status and decision-making power

decision-making power (economically) is a use of resources (spending/investing/malinvesting)

money represents the power of free market participants to make decisions

the superorganism benefits most when decision-making power is most free, since the superorganism will tend toward its natursl potential mixed with the conditional dependent nature of all things in a correlative way

the capital would be best employed when used most wisely, yes?

what is the wise aim of the superorganism?

or does it not work like that? is there no natural potential and all suchness that moves the superorganism in one direction or another?

regardless, capital is stored when saved...this is a different kind of action, and it has a different kind of effect on economy...heavy on the time function (decision-making and longview of life time span)

when an economy has money, it has debt (credit) and other forms of payment etc

it has forms of borrowing (as we know, the debtors and savers go way way back)

and so is it such that when the saver saves, the borrower can borrower, and thus employ those savings accordingly?

such that savings are always at risk of malinvestment, yet also have the chance for successfull expansionary investment, a driving force, unless spent and consumed in short enough time to call it 'spending' or 'consuming' the good?

what about the savings value that is stored in the savings medium? that doesn't really go anywhere (in a rational savings and capital-based economy), that value stays intact, and doesn't leave the saver until the saver wants to employ it, so the saver isn't at risk of its own savings being malinvested, since his savings are held (owned - possessed) unambiguously by him and that value is untouchable by anybody else's malinvestment or consumption, except his own

unless...the existing capital structure gets so consumed / malinvested ...that the inert functionally (for any life supportive economic purpose) valueless savings medium doesn't have much real world capital value to access

so where does that leave us?

I will no doubt see much light from FOFOA's intended post furthering the matter. Says it will be along the track of Moneyness.

burningfiat said...

Some opinion on the Goldman Sachs resignation by Martin Armstrong, who has previously butted heads with GS, because he wouldn't join the "Club" (see for instance http://fofoa.blogspot.com/2009/04/martin-armstrong-on-goldman-sachs.html):

http://www.martinarmstrong.org/files/Pi/index.htm

Really a call for the death of the Vampire Squid based on the (IMHO) unlikely non-intervention of Government at the next decline (nice thought though. Hope it will come true):


All over the internet is the release of the resignation of Greg Smith from Goldman Sachs. The culture in Goldman Sachs has been highly debated for quite some time. I believe that after the Government took down its major competitor Salomon Brothers for manipulating the US Treasury Auctions, there was a major turn in the philosophy at Goldman Sachs. I believe that was orchestrated by Robert Rubin who became the first Goldman Sachs’ CEO to assume the role of US Treasury Secretary. I believe that Goldman Sachs adopted a philosophy to do a reverse takeover of government that has been worldwide.
We see former Goldman people in almost every major government in Europe as well.
Nonetheless, this change in culture took place after 1985 based upon information and belief. I believe we will see this same change take place this time and I do not believe that Goldman will survive the next demise. The pressure is rising and there is probably no other firm so hated among the general population than that of Goldman Sachs. I believe the infiltration of governments has gone too far. The
famous statement that that they are doing “
God's work" as the self-proclaimed job description made by Goldman’s Chief Executive Officer Lloyd Blankfein, was just over the top. My bet is there will be no bailout on this next decline. Each time the model turns down there is a call for a bailout. In 1998 it was Long-Term Capital to bailout the banks again. Then 8.6 years later, it was 2007.15 and we got $700 billion TARP. I do not believe 3 times will be a charm. Next time, they may storm the castle searching for Frankenstein.

Nickelsaver said...

http://youtu.be/Zy4K7lFFZII

AdvocatusDiaboli said...

Julian,
very great inputs, lots to thing about...

"what is the wise aim of the superorganism?"

The pursuit of happiness, without robbing others?

Greets, AD

Gary Morgan said...

"All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man's intellect were the capital of the time."

AD said.....'nope, no humans found...'

Sigh, he almost went away, then someone answered him again, now we are inundated with his nonsense. Will the madness never end?

So, to demostrate your mindless stupidity...no humans found eh?

Those buildings just magically appear from outer space I suppose, or built by monkeys maybe? Or maybe, just maybe, humans? Surely not!

The horse carts...I guess the horses just voluntarily shackled themselves to their bridles? Wild horses often do that. Hmm, perhaps some other creature tamed them to pull the carts (fuck knows where the carts came from).

The knowledge base, passed down through generations....wow, perhaps via books and schools and the radio and TV and this weird internet thing, and just guess who invented all of those.

AD, please go away, Zerohedge would be ideal for you, you'd be top of the tree over there, whilst over here you are a squirrel dropping at the bottom of the tree.

Gary Morgan said...

Oh, another classic...in the midst of a discussion of capital and savings....

what is the wise aim of the superorganism?"

AD....The pursuit of happiness, without robbing others?

Yeah, that'll be it, the sole motivator for economic action and deployment of capital is the pursuit of happiness. Oh, and not robbing others. Genius. Really very helpful in furthering everyone's understanding of the changes ahead. We just all want to be happy. (whilst not carrying out any robberies, that bit is very important too).

Read it again AD, then sit down and consider why you post such nonsense...perhaps you are drunk frequently, or a crack addict?

Maybe help this blog find some happiness eh....you know what to do.

AdvocatusDiaboli said...

Gary,
thanks for your feedback, although you only post stuff without new thoughts, luckyly for all of us you combined two of my posts, givin a new perspective I missed to concentrate in this form:

"AD....The pursuit of happiness, without robbing others?
Yeah, that'll be it, the sole motivator for economic"

Yeah, sounds trivial and therefore almost dumb, me stupid from ZH. But please compare carefully with this of FOFOAs writing:

"All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man's intellect were the capital of the time."

Now, please jump into todays present time.
Chinese youngster trading his kindey for an IPad, resources on the TSA, a US military budget bigger than any budget else on the world. Corporations advertisements budgets bigger than any development bugets.....

I am for sure not a hippie, but taking these two sides under comparision, I like to put that trivial "pursuit of happyness" under new tests: what planes MP, PP are we talking about and is some plane missing to explain the development of the superorganism.
Greets, AD

P.S.
But hey, Gary, you sound like somebody who finds his real personal pursuit of happyness with your job at the TSA.

Nickelsaver said...

Wisedom

Yes, "Life on the Ant Farm" is one of the greatest prospects on how to take an approach on considerations.

It gets funnier every time I read it.

Nickelsaver said...

Ok if you insist on having a plane for the humans, here you go.

Super Plane

Edwardo said...

Forgive me for the somewhat OT contribution but I'd just like to note that in the span of roughly two days we now have three whistle blower accounts-we can debate the one from the putative JPM employee- but the one from Greg Smith and this one

http://www.zerohedge.com/news/terminated-cbo-whistleblower-shares-her-full-story-zero-hedge-exposes-deep-conflicts-impartial-?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

seem real enough.

Bjorn said...

"The pursuit of happiness" in the words of Mises: "Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state. The incentive that impels a man to act is always some uneasiness. A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy.

http://mises.org/Books/humanaction.pdf

So yes, I agree with AD that individual "Pursuit of happiness" is what drives the superorganism. And not robbing others should (for indivuduals) also be very important. Unfortunately it is not for quite a large part of humanity. That is exactly why we need gold, in our grubby little hands, to protect us from at least one form of robbery.

Still not sure what to think of the "human plane" in the model. I think I agree more with Nickelsaver on that point.

AdvocatusDiaboli said...

Bjorn,
thanks for your posts making things even clearer:
We got the monetary plane (token, credits, promises, ownership titles...)
We got the physical plane (tools, resources, available labour force, products)

What's missing? Jep, the decisions taking plane.
So even Mises agrees that "pursuit of happiness" is (or should be???) the director.
Let's call that plane the "directors plane" for a moment and "money" (from the MP) is the magical directing stick of those directing entities.
That is a plane of its own, having it's own (social) flows independingly from the other two planes, due to the entities combining in that plane: public expenditure quota by (democratic/totalitarian/fascist...) government, corporations advertisement, the media and in the end, you small tiny little sucker with the smallest stick today.
Is that significant enough to give it its own plane/mathematical dimension in the overall modell?
See, I dont wanna judge on moral issues how it should be, but lets try to face it how it is.
Greets, AD

P.S.
Oh, this might be just a great product for everybodies pursuit of happiness:
http://www.youtube.com/watch?v=dmuyLIrSjxI

AdvocatusDiaboli said...

P.S.
And not to forget in the directors plane RELIGION. Just look at ancient egypt where the pursuit of happiness appeart to be dying for building pyramids, or in the dark age dying for building cathedrales.

Bjorn said...

AD.

Unlike, as it would seem, most here, I value your contributions to the forum, as the diabolic advocate that you are. :-)

I will try to sketch my view a bit further.

I think that the pursuit of happiness in Mises´s definition of it IS the drivng force. The thing is that for some, pursuing happiness includes pursuing power and dominion over others. Some of them are what we would call "evil". And some others believe that they are good, but suffer from what I like to think of as godcomplex (I know what´s best for the people better than they do themselves). Some of these groups have been very successful in their aims, using their most powerful sticks, money and religion to their advantage.

We do not live in a perfect world, and therefore the "superoganism" can never function perfectly. However what I (with the help of A/FOA/FOFOA and others here) have come to expect, is that the lenght and thickness of the money stick is about to be cut quite dramatically, to the benefit of the majority of the humans.

I am still not sure about the usefulness or perhaps rather practiality of breaking down the superorganism itself into parts and trying to model them... After all what we are discussing here is how changes in the monetary plane influences the physical plane, and by extension the effect these state of affairs has on the "superorganism". But I´m certainly not dismissing your view either.

AdvocatusDiaboli said...

Bjorn,

"..have come to expect, is that the lenght and thickness of the money stick is about to be cut quite dramatically, to the benefit of the majority of the humans."

okay, I can follow that one. The only point is: whos stick? All? What stops it growing again?

Remember, even if Freegold develops it will not stop the setup:

That with public expenditure quotas above 50% (no matter if by stick taxation or stick counterfeing), that already says it all, plus the corporations sticks, Your "individuals stick" will always be the shortest one, not capable of serving the Mises/FOFOA "pursuit of happiness" superorganism for YOU!
e.g. So maybe in Freegold, 1oz gold can now buy you 200 IPads instead of just 5, still iTunes is a piece of crap and the TSA will screw you more and more.
So for me personally my conclusion is: I am stopping to play a game that I can not win or profit from. I will hopefully retire next year. I will not sell or contribute anything any longer and will not consume any of that crap any longer (which I actually did not do much in the first place). Once in a while I do get mad, but I am getting closer to arrange myself with this, finding my own peace: Debt free, villa, farmland, gold more than I can carry and by now more silver than my car can drive, and if everything stays the same, my stocks will still give me the stuff I need for retirement, sitting in my garden with my animals. I dont want to show off with that, just for the background explanation about my attitude.
Greets, AD

DP said...

Bjorn: I value your contributions to the forum, as the diabolic advocate that you are. :-)

+1

The only point is: whos stick? All?

Thou shalt only wield thy monetary stick over the people of thine own dominion? Yay and verily!

What stops it growing again?

Not a lot. Thine own people submitting to the monetary stick, and/or not understanding how to sidestep it, is what allows it to grow again.

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