The economy

I’m reading a bunch of articles about how the US economy is failing to thrive this year – how the Fed is arguing amongst themselves about raising vs. lowering interest rates – how there’s the “risk” of deflation, as opposed to the “risk” of inflation.

I think that this is an opportune time to review some basics.

First off, let’s talk about money for a moment: Money is nothing more or less than crystalized value. It’s a way to avoid having to barter directly with everyone. It’s also a standard unit that’s (ostensibly) hard to forge. I create a certain amount of value for a small number of people by doing things for them. They give me money – and then I give that money to other people who do things of value for me. The important bit is that money has no inherent value, except insofar as I’m willing to take it in exchange for my time and stuff. Historically, I have accepted money in return for my time. In the future, I hope that I can trade it back for someone else’s efforts.

In a fair system, the money and property that I have at any given point really ought to be related to “the value that I provided to other people” minus “what I consumed.” We can tinker with that equation a little bit – throwing in concepts of leverage and compound interest. However, really seriously, the wealth on which I expect to retire is related directly to the value that I brought to other people, minus what I consumed along the way.

I think it’s appropriate to generate value for other people when you’re young and fit, create a pile of crystalized value, and then trade it back later in life. That way you can relax a bit in your later years. I think it’s appropriate to have societal mechanisms, including a stock market, to help accomplish that goal. It is also appropriate to tightly regulate such a market. Indeed, we’re talking about “my time,” at root. What worse thing could you waste or screw away?

So we’re led to talk about the stock market. How should it work?

Assume for a moment that the market doesn’t affect the supply of money. In this case it’s just a casino. Everybody brings chips to the table. Some people leave with more – others leave with less. Measured over sufficiently short time periods, the money supply in the market *is* fixed. That’s why day traders are assholes – and why “high speed trading” needs to be abolished. Both are just mechanisms to extract money from the economy without adding value in return. That’s stealing.

Assuming that the money supply is *not* fixed, then one hopes that the stock market is adding value to it. This means “more money in the system,” perhaps balanced by “more goods and services out there.” Put in my terms from above: Ideally, the more that people are *doing* for each other (trade), the more *money* we might expect to see in the system – but there will also be more *stuff* in the system. The balance between time, money, and stuff will be maintained.

That’s where inflation and deflation come in. They affect the time/money and stuff/money ratio.

More briefly: The money supply ought to keep pace, more or less, with the total productivity that’s in the economy … i.e: More work being done by more people means more money and more stuff.

Now, onward to inflation:

Inflation means a *decrease* in the value of a unit of money. The usual way to get inflation is by introducing more money into the system. Inflation is *good* because you get a raise at your job, but it’s *bad* because a hamburger costs more. Inflation is *awesome* if you’re holding debt (more salary to pay down a fixed debt), and *terrible* if you’re trying to retire on your life’s savings (less hamburgers).

Deflation means an *increase* in the value of a unit of money. You get deflation (fundamentally) by taking money *out* of the system. Say, for example, that a massive real-estate run-up evaporates, and banks have to write off nearly a trillion dollars of bad debt. Lots of money left the economy. Deflation means that your paycheck goes down – but also that hamburgers are cheaper. Deflation is *awful* if you’re holding debt that you plan to pay. Deflation *rules* if you’ve got lots of money.

Let me say that again: Deflation is *bad* if you’re holding debt (negative money), and *good* if you’re holding money. However, in a *fair* world – the value at which I redeem my money would map (more or less) with the value at which I obtained it.

Neither inflation nor deflation is inherently bad. If you live in the day to day of “time traded for hamburgers,” without much of your effort locked up in money – they’re both kinda-sorta okay. The more money you have, piled up, (positive or negative) the more they matter. If you’re debt heavy and planning to work for a long time – inflation is a winner for you. If you’ve got a bunch of cash and don’t want to work anymore – pray for deflation.

For the US as a whole right now? I think we want inflation more than we want deflation. We’re a nation of workaholic debtors. Interestingly, if you posit a wealthy cabal of shadowy, wealthy world rulers – they would universally be in favor of deflation.

Me? I bought a chest freezer and I’m stocking up food for the winter. Hamburger, anyone?

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