Monday, September 27, 2010

Economics: What is currency?

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This may seem just a little *too* simple to start with, but roll with me for a moment. Understanding currency is absolutely VITAL to understanding economics, because generally speaking, currency is half of every single transaction. You buy stuff with money, you sell stuff for money. Shouldn't we understand what money is and where it gets its value?
Shouldn't we understand what money is and where it gets its value?
Entire books are written on that simple question and I've listened to more than a couple lectures about it, so I'll make this as brief as my loquaciousness allows. Currency started as a means to barter between people. In a community, some people grew produce, others were craftsmen, some of your neighbors wanted your service and some didn't, so how did you trade with the ones who didn't?

This is essentially how currencies developed. A community needed to be able to trade with one another with confidence that what they received in return for their offered goods would hold value once they try to use it with another community member. Therefore, early currencies had intrinsic values to their cultures. For instance, some Aztecs used beans as a bartering tool, and even as recently as the 17th and 18th century beaver pelts were used as currency in Canada and parts of North America.

There's many important features to a good currency, but at the top of the list is that it must retain its value. I'm sure at some point beaver pelts were no longer the cool thing to barter with and someone was the last one to know, maybe they ended up with a gang of pelts stinking up the patio. More likely they were able to sell their pelts for dollars once dollars were being widely circulated as a common trading currency. One thing we know for certain: beaver pelts are no longer an acceptable bartering medium. This tells us a very important lesson, there is no guarantee that what we use to trade with today will be the same thing we use tomorrow.

So, what are the characteristics of a "good" currency? This unequivocally depends on who you're asking. If you ask a government official, they'll always want (and historically have always found a way to get) a currency that is easy to make, so that they can make more of it (governments like spending and need money to do so). That's the reality of fiat currency, aka "paper money", you can print as much as you want as long as you have paper to print it on. And now in our digital age, you don't even need paper, it's just numbers on a computer screen. Of course, printing everything you want is a bad thing for currency, which brings us to our first characteristic:

A good currency has a limited supply. It's a very common law in any market that the more there is of something, the less value it has. The law of supply & demand. I realized that early in childhood through collecting baseball cards, "rare" equated to "high value". Why should money be any different? Of course if it's too rare, like a diamond for instance, then there is not enough supply to be usable, and besides, a diamond would be bad for our second characteristic.

It must be divisible. Being able to break up the currency helps in bartering. Think about it, when dealing with someone and all you have is a $20, but you only want to pay $15, how do you get around that? You have to hope they have change. However, a good currency would allow you to simply chip off a piece to keep, give the rest. Likewise, if it's easily separable then it should be easy to put together. Maybe something like copper? Copper works in this rule as well as with the next characteristic.

It must have intrinsic value. As noted above, this is a subjective evaluation. At one time beaver pelts held value for people in the north, but the dollar holds no intrinsic value, because if people ceased trading in dollars then it's worth would be ZERO, there is no inherent value to it. Whereas even a beaver pelt has some durable value: it can keep you warm, decorate your pad, or (God forbid) clothe you. Paper does none of that, and is not considered to be of any value without the US *using threat of legal prosecution to force its use*. Copper on the other hand has an intrinsic value, it's useful in and of itself, but it's value is so low that it would violate our next rule.

It must be portable. When it comes to metals, there's far more valuable options that follow all of these rules but keep enough inherent value that you can carry it on your person without needing a pack-mule. Gold and Silver are good options, currently a single ounce of gold is worth $1,300, that's pretty easy to carry on your person. So, precious metals are fantastic options because it follows all these previous characteristics, as well as the last.

It must be durable. Not just a physical durability, but something you can look back at through history and have certainty that it's use isn't a fair-weather option, but that it's been used for ages and stands the test of time. Of course, physical durability is important too, something that doesn't tear or disintegrate through usage is vital to future trade, so as not to devalue your wallet.

Obviously, paper money scores on like 1 of these 5. It isn't durable, has no intrinsic value, it's not divisible, and it has an unlimited supply. However, it is portable, but in the instance of our dollar it's portability works against us since you can make as much as you wish (to the detriment of its value) without worry of difficulty transporting it. If you look throughout history fiat currencies have a staggering rate of failure, and I suspect that its failure rate will end up at 100%, because it violates the very heart of "good" currency. The thought of using gold and silver will bring up some questions like, "What about banks?" or "I don't want to carry around a brick of gold!", do not fear, these questions will be addressed in a future post, but before I do I want to reveal in as many ways as possible why fiat currency is bad. Next: inflation.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, September 20, 2010

Economics: The Coming Disaster

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Hindsight is always easy. Everyone can tell you that we had an economic crisis that resulted in a recession unlike any other since the Great Depression. The real question is who predicted it? How could they know yet remain unheard? What did they know? More importantly, what was being said by those whom we were listening to, and what are they saying now? Wouldn't it seem like conventional wisdom to pay more attention to the people who accurately predicted the crash? It would also seem counter-intuitive to give more power to the same people that got us into this situation. At the heart of the philosophies practiced today are two diametrically opposed economic theories, Keynesian Economics versus Austrian Economics. My desire is to not only reveal what each of these philosophies hold as their pivotal differences, but to show how one of them reveals that the crisis is not over, and another much larger crisis looms ahead, and it may be far worse than you think.

To deliver a full understanding (and in the course of writing to help shore up my own understanding) I will lay the groundwork of economic basics regarding the nature of currency, recount historical events showing how governments historically have used currencies and the effects of their usage, whether good or bad. I'll cover topics such as inflation, deflation, hyperinflation, how a currency falls, how a currency gains value, what is a recession, who creates our money, who funds our government, and much more.

I have several goals. I hope that discussing this in chunks will not only help illuminate our current situation, but I dearly want discussion and to spark interest so that maybe someone does their own investigations and is inspired to discover the world that runs our world, because it's FAR easier to understand than I once thought, if you understand the philosophy then you can pick apart any discussion. This is why I have a growing resentment for our 2-headed 1-party system, because at the end of the day they are both taking part in the same underlying philosophies, yet they are so adept at keeping us focused on the bickering that either no one cares to get involved because "it seems too complicated" or it's reduced to Right vs Left.

At the end of this discussion I will reach the conclusion that you can't lay blame to one party or the other, you have to hold them both accountable for why our economy is in shambles. The Housing Bubble was/is bad, but there's also a Higher Education Bubble that's getting ready to pop, a dollar crisis is on the horizon and a global economic collapse. Obviously, this should worry you, it isn't entirely too late, but it's unlikely that we will avoid it since no one is coming to their senses. I personally think it will hit by the summer of 2012, but predicting the "when" is next to impossible since the variables are so many, much like seeing a gas station on fire you know that it's going to explode, you just don't know when.

Let's figure out economics.
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A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive

Monday, September 13, 2010

My Time Travel Beef

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I know you're thinking I'm going to bring up the parallel time-line issue, if I went back in time that in order for time to compensate for my tampering ways that there would need to be a new time-line created at the point of my entry, leaving us with 2 time-lines, one in which I never traveled back and one in which I did. You're wrong! You may be jumping to the next logical issue, if I traveled forward in time is there another parallel time-line issue? Wrong again! You may even be saying that quantum physics accounts for all these issues or that the recent discovery shows that we can change the past, to which I say no and no, but if you'd shut up and let me speak we may get on with today's order of business.

My real issue with time travel is that when generally thought about we consider moving forward and backwards in time, instantaneously via such methods as "Back to the Future", but perhaps I missed it, but I don't recall anyone addressing that you're not only challenged by traveling through space-time, but also space-space, because the Earth moves, so if you stood somewhere and traveled back a day you'd likely end up in the middle of space or inside the Earth. So time travel is a beyotch not only because (well, because it's impossible) you're moving back into the past but also because you need to be able to teleport to the exact location, syncing that up is on some kind of "Rain Man" multiplied by Will Hunting type insane. We'll definitely have our flying jet-packs first.

I will say that I haven't read H.G. Wells' "Time Machine", but I did see the (awful) movie and he may have circumvented this issue because his machine was not a vanishing thing, but rather a stable thing that stayed still while advancing (or retreating) through time, observing all things happening around it, thereby allowing it to stay in the sphere of the Earth and its gravity, acting as more of a "fast forward"/"rewind" rather than "skip to next chapter". I guess you could say he was ahead of his-- (bad pun truncated by smarter future-me).

Monday, September 6, 2010

Keys to Good Confrontation

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I don't know if anyone actually enjoys confrontation, I hope not. However, I think it's healthy to not necessarily shy away from it. From my experience, a healthy confrontation often leads to: closer-knit relationships, it's an unusual bonding experience and something that brings people closer after an emotional journey; greater understanding, I think it's always helpful to walk away from a situation feeling clarity where previously it was cloudy; humility, nothing attracts me to a person more than knowing they're humble, and nothing brings humility out quite like a healthy dose of resolution. That's scratching the surface I'm sure, but I want to get into what I think of as the keys to having a good confrontation that you can walk away from with a lighter heart.

1. Breathe. This whole post is coming out of my recent drama at my gym. I was working on the speed bag for a few rounds and then a trainer approached me (humbly I might add) to say that in the future if there was a rehab client on one of the tables that I shouldn't get on the bags. Now, this lit a giant fire inside me, but I knew that maybe the worst time to speak is when I'm emotional, so I nodded my acknowledgment and finished my workout. I immediately felt that someone else's workout was taking precedence over my own and felt slighted, it wasn't as if I were taking away the other client's equipment, right?? So, with all these emotions flooding I knew I was in no place to hear very well, and hearing is of the utmost importance for healthy conflict.

2. Humility. There has to be an absolute desire to understand from another point of view, if the only concern is making your own point heard then there cannot be a healthy resolution, because "getting your way" isn't healthy for anyone, listening is healthy, and you can't expect for someone else to listen if you don't do it first. Example may be the best teacher.

3. Express emotions, unemotionally. The trickiest of them all is to say exactly how you're feeling but to do it in an non-accusational, one way to do this is using language that's "removed" from the other person. i.e. instead of "You pissed me off by saying I'm ugly", perhaps something like "when I heard myself being called ugly, I was really hurt", I think this helps retain accuracy while helping paint your own picture without directly villifying the other person, helping to keep emotions abated.

4. Validate emotions. No matter how illogical the misunderstanding, it's vital to acknowledge and validate someone's emotions. It's okay to understand and even apologize for someone's hurt feelings even if you did nothing wrong, because even in a ridiculous situation saying "I'm sorry you're hurt over that" does not mean "I'm a giant jerk and I'm sorry for what you think I did". To clear up a misunderstanding it's important the other person feels valid, even if their emotions arrived invalidly. Facts are important in any conflict, and you can't change the fact of how someone feels/felt.

I'm sure there's more to it, but I think those are the ones I need to get through a confrontation, whether it's one I initiate or not. I need to be level-headed first, so that I can then be humble and expressive and genuinely understanding. If at the end of the day there's no resolution, never lie, just acknowledge you have differing views and don't try to kick the dead horse back to life.

So, how did mine at the gym go? Well, the next day I worked out and caught up with the guy afterward, asked if he had a second to talk, told him that I thought he was great and did nothing wrong in spirit, but that I was offended that it seemed like another member's workout was getting priority over mine, he apologized immediately (and I restated that I wasn't offended at *him*, but that I didn't understand the philosophy of what was said) and he explained that when a client is on the table that they by terms have rented out that entire section of the gym. I understood immediately and we had a good few minutes of clearing the air, future strategy for similar situations, and mutual understanding/respect, a quick hand-pound and man-hug and we were through. A good confrontation.