Reality constructed from feelings

October 19, 2016 § 64 Comments

The financial state[1] of any institution is defined, as a matter of knowledge, by its balance sheet.  An institution obviously has an objective financial state in reality whether or not there is a balance sheet. But without a balance sheet or its equivalent, the financial state of an institution is not known.

There is no balance sheet for the United States government: it does not exist and has never existed.

Furthermore, there is not even a coherent conceptual framework from which to define a balance sheet for the USG, let alone collect the data, let alone produce the actual report.

Therefore, confident statements about the financial state of USG are expressions of the speaker’s feelings, not statements of known or even knowable fact.

Providing historical examples of sovereign financial crises and financial prosperity does not address this point: it conflates epistemology with ontology, understanding of reality with reality itself.


[1] Understanding how this is changing and why is also crucial, of course.

§ 64 Responses to Reality constructed from feelings

  • Jeffrey S. says:

    First of all, I really do appreciate you taking the time to explain what the heck you were talking about. Your explanation is really helpful to understand what you meant in your responses to me. You can write clear and concise prose when you put your mind to it 🙂

    At first blush, I think this is the biggest problem I have with your own framework:

    “Providing historical examples of sovereign financial crises and financial prosperity does not address this point: it conflates epistemology with ontology, understanding of reality with reality itself.”

    Throughout history, we have example after example of governments that look at their treasury and say to themselves, “the coffers are empty and I need money to finance an attack against X, Y, and Z — time to tax the people or time to sell some land or time to pawn the family jewels, etc.” You are essentially saying to me that each and every one of these governments were responding to their feelings — they didn’t know what the heck they were doing, they had no proper balance sheet to work from and therefore were governing their lands using false information (i.e. because their cash flow did not represent their true financial position.) This seems, again at first blush, insane.

    I’ll give it more thought and again, thanks for writing back.

  • Zippy says:

    Jeffrey S:

    You are essentially saying to me that each and every one of these governments were responding to their feelings…

    Correct (assuming a certain scale to the institutions in question). You can consider them the equivalent of medicine men treating bacterial infections by fire dancing. They don’t understand what they are doing, and they have no idea what they could and could not do if they actually did understand.

  • Zippy says:

    Most people don’t have a hard time looking at government financial shenanigans and concluding, w.r.t. government financial management, that they just don’t really have any idea what they are doing.

    The problem is in the next step, where we pat ourselves on the back and say ‘but we know what the government should do’.

    Because no, we really don’t. We can’t.

    This is not what you might call the ‘agnostic’ position: the position that I don’t know who is right and who is wrong. This is the strong impossibility assertion: it is not possible, given the current state of knowledge, for anyone to know what they are doing.

    Pertinent: https://zippycatholic.wordpress.com/2015/10/28/gold-backed-currency-fiat-dollars-in-a-house-of-mirrors/

  • Jeffrey,

    When money was made from precious metals, it was possible for a government to run out of the raw materials out of which physical money was made, in which case their would be a need (analogous to a private institution’s need) to acquire money.

    The only way this could happen to our government would be if their were a paper shortage.

  • Zippy says:

    Even a paper shortage likely wouldn’t be a big problem – in terms of supply of the primary medium upon which securities are printed – in a world of electronic ledgers. If the treasury runs out of paper there are other options which would be mostly transparent to most people.

  • GJ says:

    It seems to me that this is a problem that arises from considering the whole of government as one big institution. But we can take the currency creating and destroying parts of government as distinct.

    They (actually two sides of the same coin) act as a ‘reference’. As financial state is in terms (at least in part) of obligations owed in a certain currency and the ability to meet those obligations, clearly it doesn’t apply to the reference.

  • GJ says:

    Alternatively:

    If financial state is in terms of the ability to meet obligations owed in a certain currency, for the issuer of that currency the concept of financial state has just about zero useful meaning since in principle and in practice, the issuer can always issue sufficient currency to meet the obligations.

  • Zippy says:

    GJ:
    Now add in the fact that an objective financial state does exist in fact, though it cannot be measured in terms of securities issued by the sovereign.

    Google can always issue stock in order to meet obligations owed in stock; and in general its “stock budget” will never be in balance (nor should it be).

    But this doesn’t imply that it has no objectively real financial state which we can know to some reasonable degree through some economic measure independent of Google.

    Unfortunately, in the case of sovereign finance – although we know that its objective financial state exists – we don’t know what to measure, what units to measure it in, or even how to think properly about sovereign economic powers, properties, and obligations.

  • GJ says:

    I take for granted that [objective] financial state is the ability to meet financial obligations. An institution is financially unhealthy if it is unable to meet its obligations, and healthy if it can. (This of course doesn’t just hold for some point of time, and probabilistic modifications can be used with regards to future points of time).

    Google’s financial state has significant practical meaning since it owes something other than things it issues, such as tax dollars.

    But as long as a government’s obligations are entirely in terms of the currency it issues, then it can always meet its obligations so is always healthy.

    So as the amount of currency a government can issue is both in principle and practice unbounded (and its obligations finite), we can say that its financial health is unbounded.

    I guess what I’m saying is that the question of a sovereign government’s financial health has an objective answer, but is in practice unhelpful: it’s like inquiring about the obtained when one subtracts a finite value from an unbounded (or infinite) one: the answer is objectively (and will always be) ‘it’s unbounded’ or equivalently ‘it never changes’: a sovereign government always has an infinitely good objectively financial state.

  • Zippy says:

    GJ:
    It is true that if we simply assume that it is impossible for a government to be in better or worse financial state, then financial state is meaningless. So government can spend whatever it wants on whatever it wants with no financial consequences to itself as an institution.

    I’d just suggest that the view seems to lead rather immediately to a reductio of itself.

  • Zippy says:

    Also, capacity to meet financial obligations is not a good definition of financial health. It is more like a definition of living paycheck to paycheck until disaster strikes.

  • GJ says:

    It is true that if we simply assume that it is impossible for a government to be in better or worse financial state, then financial state is meaningless. So government can spend whatever it wants on whatever it wants with no financial consequences to itself as an institution.

    I’d just suggest that the view seems to lead rather immediately to a reductio of itself.

    Precisely, and this understanding of financial state explains the intuition certain people have regarding gold v. fiat currency:

    Certain governments in the past were unable to meet obligations in gold, for example. Which means they were financially unhealthy. Some of them crashed hard.

    On the other hand, unmooring currency so that in practice the government’s obligations can basically be met in something it issues is precisely insane, allowing governments to rack up unbounded obligations within their own marketplace.

    Yes, the situation is absurd, but that’s not due to the definition of financial state used, but rather how modern governments have treated finances.

  • GJ says:

    Also, capacity to meet financial obligations is not a good definition of financial health. It is more like a definition of living paycheck to paycheck until disaster strikes.

    Which is why [possible and likely] future obligations are relevant.

    If you disagree, then I should ask:

    What is financial state? What does it mean to be financially unhealthy or healthy?

    The only answer that I have is that it’s the ability to meet obligations, both present and future.

    And what is disaster striking? Either an unexpected increase in obligations or an unexpected decrease in the ability to meet existing obligations (e.g. being retrenched).

  • Zippy says:

    GJ:
    You have to make up your mind whether the government’s financial health/potency is or is not objectively unbounded. Of course if you assert both simultaneously you get insane results.

  • Zippy says:

    GJ:
    Actual obligations and possible future needs are not the same thing.

  • GJ says:

    You have to make up your mind whether the government’s financial health/potency is or is not objectively unbounded. Of course if you assert both simultaneously you get insane results.

    When its obligations is in a currency it issues, it is unbounded because it can keep issuing.

    When the obligations are in masses of gold that it does not have and cannot obtain, then the health is not unbounded.

    And that’s because financial state/health just is the ability to meet obligations.

  • c matt says:

    Maybe the measure should not be so much in a government’s ability to meet its financial obligations, but the willingness (either voluntarily or at the business end of a gun barrel) of creditors and others to invest in it. Like its bond rating, use of its currency as a means of trade. Of course, this then goes beyond purely financial considerations to some degree, and, in particular, assessment of its ability to force (or enforce) acceptance of its currency by others.

  • GJ says:

    Actual obligations and possible future needs are not the same thing.

    This seems to be splitting hairs in an unhelpful manner.

    I can easily readjust by saying that financial health just is the ability to meet ‘actual obligations and possible future needs’.

  • Zippy says:

    GJ:

    When its obligations is in a currency it issues, it is unbounded because it can keep issuing.

    Yes, you keep saying that, which is why your understanding of financial health is obviously false. For example if the sovereign cannot economically provide employees, soldiers, etc with the economic capacity to keep food on the table and a roof overhead, his government will die. He has to have actual economic potency – a base of actual property with value rooted in objective reality – in order to survive as a sovereign; not merely a formal capacity to issue securities.

  • GJ says:

    Yes, you keep saying that, which is why your understanding of financial health is obviously false. For example if the sovereign cannot economically provide employees, soldiers, etc with the economic capacity to keep food on the table and a roof overhead, his government will die. He has to have actual economic potency – a base of actual property with value rooted in objective reality – in order to survive as a sovereign; not merely a formal capacity to issue securities.

    Or to put it differently, the sovereign has other obligations.

  • donnie says:

    A couple of questions:

    1. Can we still judge the the financial health of a city or a state in terms of fiat dollars since neither of those entities issue fiat dollars?

    2. Can we judge the financial health of another sovereign nation in terms of a different sovereign nation’s fiat currency (e.g. evaluating the health of Greece in terms of US dollars)?

  • Zippy says:

    GJ:
    So you appear to have reached the reductio on your own. Objective financial state exists and matters; can be more or less healthy; requires a balance sheet or equivalent in order to be known. The balance sheet cannot be constructed and measured via securities issued by the sovereign himself (whether issued electronically or printed on gold coins); and indeed we do not even have the conceptual tools needed to say what that balance sheet ought to be like, let alone do we have an actual balance sheet populated with real data.

  • Zippy says:

    donnie:
    Yes to both.

    Governments which do not issue their own tax vouchers (fiat dollars) but instead use a third party security are not financially sovereign. That is why (e.g.) Greece de-facto abdicated its financial sovereignty when it joined the EU.

    EDIT: As far as I know most or all of these governments do not produce the same financial reports that a private company is required to produce. So – to the extent that is correct – the point is somewhat moot. Basically we have some idea of their cash flow but we still don’t have a balance sheet or P&L.

  • GJ says:

    Zippy:

    So you appear to have reached the reductio on your own.

    More than that; I think we have converged on something important to point the way forward:

    and indeed we do not even have the conceptual tools needed to say what that balance sheet ought to be like

    We can say now that a good financial state is to the ability to meet obligations (past and present), and that a government’s obligations are not necessarily ‘simple’ (e.g. I owe X persons Y dollars, 2 kg of corn, this 4 acres of land etc), but as you have pointed out a government also has the obligation to preserve a useful base of actual property (which cannot be easily reduced to a ‘simple’ list of owing specific parties specific quantities of things). And there are likely other such obligations.

  • Zippy says:

    We can say now that a good financial state is to the ability to meet obligations …

    That definition is as terrible now as it was the first time you wrote it. My capacity to buy a motorcycle (or not) is an element of my personal financial health. But I am not obligated to buy a motorcycle.

  • GJ says:

    Okay, so the definition is incomplete.

    We’re still making progress as to a conceptual framework of financial health for government beyond the standard ‘taxes vs budget’. It includes

    a) ability to meet both simple and non-‘simple’ obligations and needs, both present and future

    b) ability to purchase actual property when desired (but it should be noted that in its own marketplace, a sovereign government has the ability to purchase practically anything on the market)

  • Zippy says:

    GJ:
    Yes; in other words, a balance sheet.

  • GJ says:

    Zippy:

    Rather, I would say that with such an understanding of financial state, though it is inchoate we can begin to imagine a way to define a type of balance sheet to quantify relevant things for determination of financial state.

    Not that quantitative results are necessarily needed; as you pointed out that without sufficient economic potency in terms of useful actual property the financial state of the government is unhealthy.

    But this also means that we have already arrived at some possibly coherent conceptual method to reach a judgment about financial state of governments in some instances.

  • GJ says:

    In fact, I think we can make a useful conceptual generalisation:

    The financial state of a government is unhealthy when it cannot meet present and future obligations both simple and non-simple.

    We may not yet know what financial health is, but we have some idea about what financial unhealth is.

  • Zippy says:

    GJ:
    No offense, but you appear to be just sneaking up on beginning to grasp what I’ve meant by the term ‘balance sheet or equivalent’ in all of the decades I’ve been using it. Nothing wrong with that — my suboptimal editorial choices in blogging for non-finance folks is no doubt a contributing factor.

    But if your first response to dawning understanding of the concepts in general is that it doesn’t sound so hard to develop a balance sheet for USG, I’d gently suggest that that is because you don’t yet know what you don’t know.

    That could be wrong. Once in a great while youth and skill wins over experience and treachery. That is pretty rare though.

  • notruecatholic says:

    You theory of sovereign finance make me think of Mises calculation problem. Except yours is based on economic realism. Might be ironic to market it : “the sovereign calculation problem” (I try to find title as good as yours :P)

    The way I think I understand the problem is that treasury and central banking are intrinsically mixed and what one do affect the other. Taxation as share of the real economy is intrinsically linked to taxation as taxing takes tax-vouchers in, creating potentially deflation. And government spending is both using real wealth of the real economy owned via taxation, and spending tax-voucher creating potentially inflation.

    An illustration of how it is mixed/”there is no national debt” could be when USA had no fictional national debt. When there was no “national debt” under Andrew Jackson then it was creating deflation. It is ironic that by trying to have no central bank, he was still playing the role of one, except the treasy was the unoffical central bank in favour of deflation without any reflection of why it is for deflation because it had no central bank policy (because anti-realistc economics).

    You said there is no such thing as national debt. Its logical conclusion is : There is no such thing as government surplus account in tax voucher (only anti-realist stupidity).

    When I tried to half-fix the problem I mainly tried to use GDP and inflation. Do you think any measure of national wealth is meaningless? Is a measure of the government as share of GDP meaningless? Do you think the measure of inflation/deflation are meaningless? (real question, no troll nor irony). Taxation being owning a part of the real economy, you could compare to how much of the economy the state is, allied with a measure of inflation/deflation. No “accounting balance sheet” but some measure of estimation.

  • Zippy says:

    notruecatholic:

    You said there is no such thing as national debt.

    Yes, but by that I do not mean that nothing is going on. What I mean is that the word ‘debt’ in the term ‘national debt’ does not actually refer to debt or anything resembling it.

    It refers (with apologies to Douglas Adams) to something almost, but not quite, entirely unlike debt.

    I’ll probably have to re-read your comment later though.

  • notruecatholic says:

    Sorry, I meant : you said there is no such thing as “national debt”.

    It seems I sound to you like I got it less than I think I actually do by not being clear enough. The way I got it is that government can be in bad financial shape, but you can not measure it in tax-vucher unit which he can print. We do not know how to measure it. So we are unable to say if it is in bad financial shape or not.

    I try to propose some approximation better than “my feeling”.

  • vishmehr24 says:

    Metaphysical realism about money apparently leads to a stitution where we can say nothing about money. For money is related to state finance and the state finance is necessarily opaque.
    A very unreal situation, as I see. People really have no cause to object to or even discuss anything related to the state., For the state finances are necessarily opaque and nothing else may be maintained.

  • vishmehr24 says:

    “you can not measure it in tax-voucher unit which he can print.”
    Before 1971, gold could be claimed on presentation of dollar notes. Gold is measurable. So the claim is false for a currency on gold/silver standard.

  • Zippy says:

    A primary rule for dealing with reality is to unlearn the things you ‘know’ that aren’t true.

  • Zippy says:

    I’ve already shown multiple times why commodity backed currency actually makes the situation more obscure, not less.

  • vishmehr24 says:

    Fiat currency was held to be morally dubious whenever it was introduced. Now Zippy has proved it.

  • vishmehr24 says:

    Zippy,
    Your point about gold rests on entirely arbitary stipulation that only industrial uses of gold are to count towards its objective value. That is metaphysical realism.
    Hence, all the people who have appreciated gold for other reasons over thousands of years were deluded.

  • Zippy says:

    vishmehr24:
    My point about gold is about what happens when you print bearer securities on it (like gold coins bearing Caesar’s likeness) and that, similar to bank deposits, gold securities (like ‘gold standard’ dollars) represent not title to gold in a vault but a claim against the balance sheet of the issuing institution; and further, that the perception of gold as ‘money’ distorts its market price.

    But your feelings are noted.

  • Zippy says:

    notruecatholic:

    I had a chance to read your comment a bit more carefully. It isn’t that GDP is meaningless — I frankly don’t know how good it is as a measure. But GDP doesn’t pretend to represent a balance sheet: it is (very roughly) analogous to the revenue line of a P&L: not a measure of state but a measure of what happened over a fiscal interval of time. The same top level P&L numbers can apply to institutions with wildly different balance sheets, with implications for financial health that are hard to overstate.

    I think it is true that part of the sovereign’s balance sheet will be related to the aggregate balance sheet of the private economy, and that may be a kind of starting place. But the relationship is obscure: it is like observing that Google’s balance sheet is related to the aggregate balance sheet of all of its customers.

    As for inflation/deflation, it isn’t unimportant but its importance is predominantly exaggerated and misunderstood. Also people have Really Strong Feelings about it which interfere with their ability to grasp what it means in reality. I don’t have a comprehensive theory but as a number which represents the exchange rate between fiat dollars and other property we really ought to expect plenty of natural relative price movement, even if everyone were pretty objective about ‘money’, which they are not. And if you don’t like its relative price movement there are all sorts of non-dollar-indexed assets you can buy.

  • Zippy says:

    There are other hints here and there. The market cap of listed US companies is about $20 trillion, and I am sure that someone somewhere has a guesstimate of non-listed companies. But this suffers from the confounding factors already mentioned: even if we can get accurate readings on ‘the US economy as a whole’ that doesn’t do much other than provide hints about USG specifically.

  • Brien says:

    Maybe the following helps, if only by moving the conversation forward in a “nope, that’s not it” sort of way…

    It would seem the difference between a sovereign and Google, is that the sovereign can (in theory) help himself to any existing goods possessed by his subjects, while Google (in theory) has to wait for its customers to come and ask for its services. This is what owning (defending, regulating, etc.) a market means. However, if he beggars his subjects or forces them into hiding he will get very little.

    Therefore, the sovereign’s wealth is the total wealth in his dominion, discounted by the likelihood of breaking the bonds between himself and his subjects. The more robust his collection mechanisms (including spiritually and culturally: force of custom, etc.), the larger the portion of total wealth he can call “his”. Perhaps the math used to analyse Credit Risk can be adapted here? I fear I will need to learn more finance before I’m truly helpful to this conversation.

    A prior question, though, is how do we measure this wealth? I’m tempted to suggest a measure of physical stuff, rather than abstract value. Perhaps Joules, either directly (fuel, power grids) or in energy saved from needed objects that you have and therefore don’t need to make.

  • Zippy says:

    Brien:

    I’m tempted to suggest a measure of physical stuff, rather than abstract value. Perhaps Joules, either directly (fuel, power grids) or in energy saved from needed objects that you have and therefore don’t need to make.

    It is interesting to try to think of it in terms of physics, especially potential energy: how many calories can be put to work at the sovereign’s command?

    Ultimately that is probably too reductionist: utility isn’t reducible to calories, let alone is property so reducible. But good thoughts nonetheless.

  • notruecatholic says:

    @brien
    Thank you, this is what I was trying to say (the difference between google and a sovereign). But I am very bad at making myself clear. As for using a money or a physical stuff, it is just a question of price-index. This is fundamentally an excercise that is hard and with trace-off. Parity of purchasing power, inflation index, are example of trying of take into account the relative change of prices for different product. It is a judgemen about what is more important and what is less important. Or taking a famous quote about “inflation is lower because smartphone are cheaper” : “I can not eat my phone”.

    @zippy
    I do not have personally any strong feeling about inflation/deflation outside of the immediate price of what I buy and those have been stable these last years. Your usury faq has totally destroyed my austrian-fetichism about it. I have read the history of economic thought of Rothbard, and you made me think “they were just wrong”. Edward Feser made think so about how badly Rothbard and many other saw St Thomas of Aquinas’ metaphysics.

    As for “beginning of a hint” I will take it as flattery. Much better than “cool story” or “your feeling have been noted”. I still wonder if you understood my hint which Brien said more explicitly (I was trying to be short).

    And how about my view about the link between inflation/deflation and taxation/spending. You say inflation is not that important, I wonder how much. Hyper-inflation sound quite obviously pretty stupid to me, but generally most sovereign are not stupid enough to do it (even though they succeed to be many of them stupid enough to do it). As for low/high inflation/deflation, I have no particular emotion about them being important or insingnificant. They just sound important to me as something to be taken into account in a monetary policy as a sovereign has de facto a monetary policy whether he wants it or not. (I read again my Jackson comment and it seems to me that I used correct vocabulary to avoid to confusion between mainstream language and your understanding of money/sovereign).

    Thank you for any time you take to enlighten me.

  • Zippy says:

    notruecatholic:

    Hyper-inflation sound quite obviously pretty stupid to me, but generally most sovereign are not stupid enough to do it (even though they succeed to be many of them stupid enough to do it).

    In defense of sovereigns who have fallen into hyperinflationary holes, it isn’t as if there is any reality-based concrete framework to help them make rational choices. Everyone is pretty much just going with their gut.

    The platitudes are the easy part. Making informed, particular choices is the hard part.

    I suppose part of what may make me incomprehensible to many laymen is that ‘going with your gut’ is pretty much all that laymen know. The cash flow finance they think they grasp is already wrong even at the level of a household, but their instincts allow them to make unprincipled exceptions and muddle along pretty well nonetheless.

    As Ross Perot once observed though running a corner seven eleven store isn’t like running Wal Mart.

  • notruecatholic says:

    I take note that I need to work on my pride. 🙂

  • Zippy says:

    notruecatholic:

    Don’t take me as belittling your point of view, which I think is helpful to the discussion. I don’t have anything to offer beyond pretty generic platitudes myself.

    In fact if anything is going to even start us on a path toward really understanding sovereign finance it is going to have to come from somewhere outside of the hothouse of modern anti-realist thought on the subject.

  • josh says:

    If I am right and “money” is the inflated asset price that results from a societal nash equilibrium in the hording of a particular good as a means of saving and ensuring liquidity, then hyper-inflation can be seen as the collapse of this bubble generally accompanied by a shift to some other good, a demand-side rather than supply-side phenomenon. The adding of zeroes to the government securities comes after.

  • notruecatholic says:

    I did not think you did. I had not realized that hyper-inflation is not so obvious and that there is a lack of any serious understanding of money. I meant it as a compliment (ergo the smiley, I tried to be clear!). I like being corrected (well, I can be too proud and stubborn too, but I tend to like it). It means I get closer to the truth(hopefully), and also I just enjoy intellectual challenge.
    And I was not sure if your silence was me not being clear, you lacking time or any other factor. After if you have nothing to say on X matter, it is fine.

  • Zippy says:

    If “money” were a bubble (“nash equilibrium” to make it sound more respectable) in an otherwise worthless class of property then when you “spend” it (trade it for something of actual value) you would be selling something intrinsically worthless in exchange for something of far greater value.

    This would be, at least morally, a species of fraud.

    On the contrary: “money” is just especially liquid property, typically a security, with the connotation that it is easily transferred and pervasive enough to be used as a rough measure of the relative value of different goods.

  • Josh says:

    It’s a bubble, but it’s a rational bubble and we obviously disagree about the intrinsic value of an asset that participates in the form of money but does not cease to be itself.

  • Zippy says:

    Josh:

    I’m pretty sure ‘rational bubble’ is a contradiction in terms.

  • Josh says:

    Which is why I call it a Nash equilibrium which is in no way self contradictory.

  • Zippy says:

    If money is a Nash equilibrium (a.k.a. bubble) in a worthless good, it is basically a glorified game of chicken. Participating in a glorified game of chicken is approximately as rational as participating in a dollar auction.

    I don’t believe that money is a bubble in an otherwise worthless good. But if I did, I would certainly have moral qualms about using it.

  • vishmehr24 says:

    Zippy,
    “you print bearer securities on it (like gold coins bearing Caesar’s likeness) ”
    Why did US move off gold convertiblity in 1971?
    UK move off gold standard in 1931?
    Surely they reckoned that they did not have gold to cover the liablities. So the balance sheet could be reckoned.

    Basically you are wandering all over and moving the goalposts besides. The point that fiat currency makes govt fianaces opaque is probable. But the point is hardly transferrable to situations where physical metal is itself the currency.

  • Zippy says:

    vishmehr24:

    Subjectively why people historically thought and did different things is beside the point.

    Commodity currencies (e.g. “gold standard”) are less transparent than pure fiat currency, for several reasons already explained multiple times. How much gold the sovereign (or a bank or other private institution) happens to possess has no correlation to its wealth or financial health, that is, its balance sheet. Gold is not the only kind of property, nor is it a particularly important kind of property. This has been explained to you many times.

    But your feelings are noted.

  • Zippy says:

    In even more simplified terms:

    To the extent you believe that the wealth of an institution is equivalent to (or even correlated to) how much gold it possesses, you are deluding yourself.

    That is what makes gold standard currencies and the like inherently less transparent and more distorting than fiat currency, which is not irrationally entangled with gold.

    As far as I know, Google possesses no gold. (Well, no gold other than the gold in electrical connectors in its data centers). To the extent you believe the wealth of Google to be correlated to how much gold it possesses, you are deluded.

  • […] standard is financial poison.  They like the gold standard because GOLD.  Their attachment is pure unreasoning emotion.  A gold standard is, objectively, a requirement to literally add useless dead weight to […]

  • notruecatholic says:

    @brien
    A way to think in real stuff about governemnt is the liabilities of pension/healthcare/welfare. If the government hyperinflate (print lot of money to respect its promise to print more money in form of t-bill or general spending), the promise to buy real food, real doctor, real house, does not get fulfilled by just printing more tax voucher. At one point the over-printing is so big to hit negative return and it can fullfill less and less of its obligation no matter how much more it prints. (Else government spending would be unlimited).

  • ignacy says:

    The Nash equilibrium factor seems to be very tightly related to the liquidity premium of a given asset – in fact, it is the main factor behind the size of the liquidity premium. What’s more, there are usually multiple equilibria in the size of the liquidity premium that are just as good.

    This is one of the main insights of technical analysis. Support / resistance levels indicate the levels at which we assume experiencing moves around one local equilibrium, whereas breaking these levels indicate move to another equilibrium. This phenomenon is widely observed in currency markets. The fact that it is not in a worthless good doesn’t mean that the fluctuations in liquidity premium are very large in comparison to the intrinsic value.

    If an asset has a stable equilibrium in that sense, and if I intend to use it only as a medium of exchange, i.e. I buy it only in order to carry a transaction, then I don’t have to care about its intrinsic value or rationality of the liquidity premium level, only about the stability of the premium. In fact, all liquidity motive has a (often very significant) ‘speculative’ or ‘hot potato’ aspect. But it doesn’t mean that it is irrational to do so. Not all exchange has to be done for investment purposes to be legitimate.

    In a comment in another thread you compared ‘irrationally’ high but stable liquidity premia to ideas that have gained currency (pun intended) over millennia. In fact, if someone seeks to just interact with Mohammedans, getting to know Islam may be a wise choice.

  • Zippy says:

    ignacy:

    This is one of the main insights of technical analysis.

    As you might imagine, I am not a big fan of technical analysis. (Here is a complete list of all billionaires who became billionaires on technical trading: []).

    My own view of support levels is more psychological: people know that to make money you have to buy low and sell high, which makes them reluctant to sell for a lower price than their buy price. So you can expect a lot of falling knife catchers to show up wherever trading volume has been high.

    Agreed that when viewed as an intermediary for exchange you really don’t care about the reality-based value of the medium of exchange. Inflation and deflation aren’t going to get you if you sell your car for dollars one day and use those dollars to buy a different car the next day. In fact that is why folks who use dollar-denominated assets for long term storage of wealth really have no excuse when they don’t like how things turn out. It isn’t as if dollar denominated property is the only kind of property out there.

    However, there is an inherent radical instability in any medium of exchange which does not have a strong underlying intrinsic value proposition to go along with its liquidity.

    In fact, if someone seeks to just interact with Mohammedans, getting to know Islam may be a wise choice.

    Sure, but getting to know Islam isn’t the same thing as affirming the truth of Islam. There is always a moral problem in deliberately selling something for vastly more than you know it to be worth — as problematic as putting a number on that may be. There is probably a ‘natural’ maximum liquidity premium in there somewhere.

  • ignacy says:

    However, there is an inherent radical instability in any medium of exchange which does not have a strong underlying intrinsic value proposition to go along with its liquidity.

    Agreed, of course.

  • […] conforming our will to an objective moral reality which exists prior to our wishes.  Not everyone feels the need to live within the constraints of consistency (at least not, uh, consistently); let alone […]

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