Just what kind of money is this?

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August 6th, 2010 Rajiv Shastri

Is this a strange question? Think about it…

Just what kind of money is this, when the only way to preserve its value is to lend it? If you hold it idle, it loses value. If you invest it in anything other than debt you may beat inflation, but then again, you may not. So the only way to preserve its purchasing power with any certainty is to lend it, and lend it to someone who you’re certain will pay you back. Which in most cases is the government, because regardless of how badly they mess up, they can always create more money to pay you back. But this means modern currency serves only as a “medium of exchange” outsourcing the “store of value” function to debt. And if one of money’s primary functions is assigned to debt, is it any surprise that debt has become the foundation for our economies?

But is that all our money is meant to be? Something that has “value in exchange” but no “value in use”? And if it doesn’t have value in use, how can it have value in exchange and/or be an effective store of value? On the hope that this mysterious “value in exchange” would persist tomorrow, next month and next year?

From the time Richard Nixon decided to default on the US Dollar’s obligatory link to gold, mankind has wondered what money had become. But Milton Freidman, with glib tongue and circular reasoning, convinced all who needed to be convinced that this was everything money was ever meant to be. I believe he exhausted people into accepting his theories, though the only proof I can offer for this belief is experiential. Argue with a modern monetary theorist, and I can guarantee you a headache, even if you are Arnold Kling. Politicians in the 1970s didn’t stand a chance. It was either accept or suffer. They, being politicians, chose to accept.

Circularity characterizes every chartalist currency argument, not just those connected with the importance of central banks, as Arnold mentions in his post. Imagine this conversation:
 
Me: Modern money has no value in use, so how can it have value in exchange?

Demented Chartalist (DC): As long as it can be exchanged for something valuable, it has value.

Me: But how can something without value be exchanged for something valuable?

DC: I never said it didn’t have value. In fact, I remember telling you that it did.

Me: So tell me once again, why does it have value?

DC (rolling his eyes): Because it can be exchanged for valuable things!

Me: But how can it be exchanged for valuable things when it doesn’t have value?

DC (smiling benignly): But it can be, so it does.

Me: So if it can’t be, then it won’t?

DC: Precisely! But that’s not going to happen. The government won’t allow it.

Me: Aah! So it has value because the government says so?

DC: Don’t be obtuse. It has value because it does, and the government likes it that way.

Me: But why does the government like it?

DC: Well, because the government can make all it needs without spending any of it to do so. And even if it did have to spend some of it, it could always make more.

Me (kneading my temples): But if the government can make all it wants without spending any of it, then how does it have value?

DC (smiling tolerantly): Didn’t we get past that?

Me (in pain): No, we did not! If the government can get it without exchanging anything valuable for it, then how can it have value?

DC (slowly): Because the government can exchange it for valuable things.

Me (with quivering lower lip): But how can the government not exchange anything valuable for money and then exchange money for something valuable? How?

DC (pityingly): You still don’t get it, do you? Because it can… That’s the beauty of the system. It can.

Me (weeping): No, I don’t get it… How can they.. Why can they… but…

DC (gently): I think you’re too overwrought to have understood. Do you want me to start over, a bit slower this time?

At which point I run out wailing like a little girl, damaged for life…

Living in a world with modern currency is like being imprisoned in a Joseph Heller book.

And I am Yossarian.

The blogger is an independent macro-economic consultant and has been a part of the debt market for over 15 years. He also blogs at www.rajivshastri.com. Views are personal

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3 Responses to “Just what kind of money is this?”

  1. Arun Says:

    Rajiv… fantastic.. something to chew on…

  2. Rajiv Shastri Says:

    Thank you, Rahul…

  3. Rahul Says:

    Kudos Rajiv, very interesting read … definetly food for thought..

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