One for the economists

[jtaunton]

Now I don't know enough about money to fully flesh out this theory but, in the old days, up to Charles & Diana's wedding I think but maybe Andrew and Fergie, the Royal Mint would produce a commemorative crown with a face value of 25p.

Nowadays, you have to buy a £5 commemorative coin.

Apart from the obvious rip-off, it means that you now have what I would imagine to be a large ammount of money theoretically in circulation, but which isn't actually going to be spent.

Is this a significant enough ammount to affect things like CPI or anything else ? Don't know how it would, and came up with this whilst drinking, but just wondering ........

 

[felix]

Well I'm no economist either but here goes anyway.

Money isn't actually worth anything. It's just a convenient way of swapping which is what trade is really about. You swap your time for something that somebody else made using their time.

Now this direct swapping business is complicated. You go to the market with some car parts you made in your garden shed and try to swap one for a pint of beer. The trouble is that the man with pints of beer to trade doesn't want any car parts. He's come looking for a bacon butty. You curse the fact that you spent the morning making car parts instead of bacon butties and go off in search of somebody who wants them. When you do find somebody willing to trade you discover that all he has on offer is box full of toilet brushes and so it goes on.

What we need here is a commodity which is universally tradable; something like gold - or money. So you've just invented money but you have a new problem: How do you determine its swap value? Gold is easy because it has a value in its own right and, in the early days, so did money because it was made of the stuff. Paper money still had a value because it was a receipt for real money.

The trouble starts when you abandon that gold standard and start printing money willy-nilly - which is exactly what we've done. Look at it this way. Time, ie labour, goes in and stuff made with it comes out. With very few exceptions, the cost of everything is all labour. It should be obvious that, taken as a whole, we cannot buy more with our money than we made with our time.

So what happens if you take money out of circulation? Answer - prices go down. Now when did you last see the retail price index go down? Don't all speak at once! The tiny amount of money being hoarded as special coins - or any coins at all for that matter - is swamped by the extra money poured into the system by governments who like to spend more than they dare collect in tax. If you want an example of this on a grand scale look what happened in Germany after the first world war.

To compound the problem we now have a new fly in the economic ointment - banks. How much of the money you spent last week was actually yours? Did it come out of your wallet as cash or did you use a credit card? Do you own your house (or car) or did you buy it with borrowed money? In the latter case who did you borrow it from? The chances are you spent a lot of money which didn't really exist because nobody has earned it yet.

So what's the answer? I haven't got a clue. Ask an economist!

 

[petewood]

The chances are you spent a lot of money which didn't really exist because nobody has earned it yet.

But isn't it the case that the banks and building societies lend you money that has been invested with them, therefore you are spending money that someone else has earned.

In fact if you consider that a lot of the money in the banks will have come from the more wealthy including shareholders and bosses, you could say that if it was earned by a worker (A), lent to the bank by the shareholder/boss (B) in exchange for a bit of interest, lent by the bank (C) to you (D) in exchange for more interest.

This then leads to the fact that some people can be both A and D in which case they would be borrowing the money they have already earned themselves!!

 

[pipme]

Economist ? We have never produced a good 'un have we?
I think the difference in growth between GDP (Gross Domestic Product) and M4 Broad Money ... amount of dosh sloshing throughout .. gives some idea on real HMG induced inflation, GDP around 2.5% M4 around 9% ... More or less means HMG printing dosh at a greater rate (6.5%) than earning .. which for thee and I is not good news .. in the long run.

When the Euphoria of the buying spree has susbsided and the reality of the credit card statement hits home, one accquires a reasonable idea about money and the senses or lack of them !!
The effect on your dosh will endure far longer than the 'feel good' effect of the buying on the old fashion senses.

 

[felix]

Petewood wrote

But isn't it the case that the banks and building societies lend you money that has been invested with them, therefore you are spending money that someone else has earned.

That is indeed how banks were first conceived. You invest your spare money in a bank and they promptly lend it to somebody else - at a high rate than they're paying you! Building societies went one better and set themselves up as non-profit organizations specifically to help people buy houses.

I don't think this simple rule works anymore. When you buy with a credit card you are spending money you haven't got. You get something on the understanding that you will pay for it eventually. The card company guarantees the payment but that doesn't mean they have real money to pay on the day. I wouldn't be the least bit surprized if banks are lending out more money than they have taken in.

 

[petewood]

The card company guarantees the payment but that doesn't mean they have real money to pay on the day. I wouldn't be the least bit surprized if banks are lending out more money than they have taken in.

But the retailer receives the money from the credit card company before the customer needs to pay the credit card company so surely they must have a reserve of cash to allow this to happen?

 

[pipme]

But customer pays 18% APR (at least enough of them do so) Credit card company borrow nearer to 4.75% a tidy margin probably less than 13% but healthy non the less... All that in the days of low interest rates, God help the gullible if the rates should climb again.
I am amazed how people use a C-card to effectively 'borrow' dosh, when they could get same money much nearer wholesale price with personal loan at around 6% APR ...At least they will pay that off, doubtful if using plastic at minimum repayment per month ... The notso tender trap !!

 

[AdamW]

I'll give you 3 eggs for that loaf of bread.

 

[pipme]

Eat now, lay later ?

 

[WoodYouLike]

But the retailer receives the money from the credit card company before the customer needs to pay the credit card company so surely they must have a reserve of cash to allow this to happen?

That's called CashFlow management. More businesses go broke on failing this then on lack of sales.