Let's debate: Money

Discussion of the Cash portion of the Permanent Portfolio

Moderator: Global Moderator

Post Reply
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 10:52 am

I mean the textbook definition ascribes three basic functions to money...

Unit of account
Mean of exchange
Store of value

Some shaky historical background from memory...

Historically it would seem that primary function of money was as a means of exchange to avoid inefficiency of barter. Technically I guess one wouldn't really even need anything other than an IOU or an accounting ledger so long as the trade occurred between a small enough group of people under a single governing body able to resolve disputes. Clay Sumerian tablets and tokens I believe we're used to keep track of trade and exchange thousands of years BC. Once trade expanded between people of different governing tribes or empires it would logically seem to become necessary to find some other item to exchange..a commonly valued commodity obviously being the natural solution...in the West societies gravitated towards metal coins either of some type of precious metal or fiat in nature when backed by an empire. Gold and silver eventually became the international standard because of their inherent physical properties and rarity.

At the outset in the United states colonies pretty much printed their own fiat currency with various degrees of success. At some point I also believe that private banks also had their own currencies...at any rate that had issues with periodic inflation and what not so eventually sometime in the mid 1800s I believe we created a gold backed currency. Things kind of plugged along that way with periodic depressions for three quarters of a century until the Fed was created to help lend some better stability to the monetary system.

The US then confiscated gold and raised price to allow expansion of money supply and that sort of continued until we went off the gold standard with Nixon. Although, we didn't update the language of government finance after this happened and still seem to suffer from illusion that our money is constrained....hence all the hand wringing over debt and deficits.

Economics has tried to move past this with MMT which attempts to update the way we think about government finances and money to the modern fiat world. Money when managed properly and wisely can be used to alleviate downturns and promote greater economic growth....and that is where we find ourselves today...with a Fed pushing directing the monetary policy and manipulating bank reserves and interest rates and the government pushing on the fiscal policy lever by giving out money to people in the mail. So far despite the cries of the Austrians there has been lower than average inflation and the financial crises have been relatively short lived compared to historical depressions....
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 12:02 pm


If cash is money and a comparably liquid form of money to gold, and it has more utility, what makes it inferior to gold once we put in the assumption of perfect central banking. Now I know that's a big assumption to make, but it does seem like what this means is that holding gold is a bet against the central banker's ability to do what's right for the economy.
That's the big unknown...I'm not so concerned with central bankers as I don't think they have the power to really do much...seem like they can adjust reserves in banking system in order to manipulate interest rates.... It's the governments fiscal policy and politicians that really have the power to debase currency. From an accounting standpoint continued government deficits are simply private sector surpluses but at what point that creates inflation is an unknown...I guess once incresses in money supply outstrip real economic production gains.. One would like to think that pols would behave responsibly and reign things in when prices start to rise but that is an unknown. In the past goverbments haven't shown themselves to do that very well.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Let's debate: Money

Post by vnatale » Sun Mar 14, 2021 2:31 pm

vincent_c wrote:
Sun Mar 14, 2021 2:01 pm

doodle wrote:
Sun Mar 14, 2021 10:52 am

I mean the textbook definition ascribes three basic functions to money...

Unit of account
Mean of exchange
Store of value


I think crucially money needs to be an effective store of value and that it's efficacy as a unit of a account and a means of exchange are properties of money that make it a better store of value. We can extend this to the properties that make certain things a better means of exchange or unit of account like divisibility or portability.

But I think for the purpose of the PP, what we are really interested in is the store of value part, because in the long term if the money we choose as our store of value doesn't actually perform its function (ie it devalues relative to real goods and services) then in the long run it isn't a good idea to use that thing as a store of value.

So let me just gather my thoughts so far.

It seems to me that the PP chooses two forms of money and that they are at odds with each other. This is by design, and my question is why this design and are the reasons for such design still good reasons?


Excellent posing of the salient question!
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 2:44 pm

vincent_c wrote:
Sun Mar 14, 2021 2:01 pm
It seems to me that the PP chooses two forms of money and that they are at odds with each other. This is by design, and my question is why this design and are the reasons for such design still good reasons?
As I understand it, gold is a form of money that is outside the scope of governments ability to devalue. Ignoring legislation that would make it illegal of course. During normal environments it should preserve purchasing power over the long run and in crisis spikensharply higher due to relative tiny nature of it's market.

The other forms of "money" are like a government checking account (cash) and a savings account (bonds). The savings accounts value does well when there is deflation...falling prices. And the cash is there for dry powder when there is a recession...it doesn't really do well per se as Harry couldn't find an asset that did well in recession.

As far as store of value I'd say bonds do reasonably well as at least on the long end they are marginally higher than inflation...and on the short side are marginally lower than inflation which I guess is the cost for having a liquid asset ready to deploy.
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 3:05 pm

I don't see evidence that the US dollar is losing to any other currency..be that the Euro or Yen...it seems quite stable over last twenty years. Why do you think this is happening or inevitable?

As far as golds appreciation relative to dollar this seems to be purely speculative at this point...perhaps an irrational fear of impending inflation that hasn't materialized yet?
Last edited by doodle on Sun Mar 14, 2021 3:08 pm, edited 1 time in total.
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 3:09 pm

vincent_c wrote:
Sun Mar 14, 2021 3:07 pm
vincent_c wrote:
Sun Mar 14, 2021 2:58 pm
investing in USD cash is going to buy you more units of gold in the long run when the US economy increases productivity.
So this obviously isn't the case in practice which tells me a choice was made to increase the money supply that didn't actually increase productivity? Maybe someone can chime in to help me figure this out.
If money supply increase outstripped productivity then why haven't we seen inflation in CPI?
User avatar
doodle
Executive Member
Executive Member
Posts: 4658
Joined: Fri Feb 11, 2011 2:17 pm

Re: Let's debate: Money

Post by doodle » Sun Mar 14, 2021 3:12 pm

vincent_c wrote:
Sun Mar 14, 2021 3:07 pm
vincent_c wrote: ↑investing in USD cash is going to buy you more units of gold in the long run when the US economy increases productivity.
Does same hold true for bitcoin? Has the dollar lost 60,000% of it's purchasing power because bitcoin has appreciated that much? Or is bitcoin, like gold just a speculative asset that ebbs an flows according to psychological sentiments not based in measured reality?
User avatar
Hal
Executive Member
Executive Member
Posts: 1349
Joined: Tue May 03, 2011 1:50 am

Re: Let's debate: Money

Post by Hal » Mon Mar 15, 2021 2:17 am

vincent_c wrote:
Sun Mar 14, 2021 3:31 pm
doodle wrote:
Sun Mar 14, 2021 3:09 pm
vincent_c wrote:
Sun Mar 14, 2021 3:07 pm
vincent_c wrote:
Sun Mar 14, 2021 2:58 pm
investing in USD cash is going to buy you more units of gold in the long run when the US economy increases productivity.
So this obviously isn't the case in practice which tells me a choice was made to increase the money supply that didn't actually increase productivity? Maybe someone can chime in to help me figure this out.
If money supply increase outstripped productivity then why haven't we seen inflation in CPI?
Great point!

Okay, so it might be because the USD is used internationally and the Fed cannot control credit creation in the eurodollar market. So there is an increase in supply of USD credit globally that makes the USD devalue against gold but not CPI.

Edit: In other words, the US is a net exporter of inflation because it’s supplying more USD but it is also importing more than it exports so buying from the US is more expensive for other countries.
[/quote]

If money supply increase outstripped productivity then why haven't we seen inflation in CPI?
[/quote]

Perhaps the CPI isn't accurate? In Australia the CPI doesn't include food and housing (not exactly a luxury ;) )
I believe ShadowStats calculates the CPI a more accurate way.

PS: Have a read of the Mises book on money, still haven't finished it, but it's very thought provoking.
https://cdn.mises.org/Mises%20on%20Money.pdf
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 4052
Joined: Sun Sep 16, 2012 5:28 pm

Re: Let's debate: Money

Post by Kriegsspiel » Mon Mar 15, 2021 7:42 pm

vincent_c wrote:
Sun Mar 14, 2021 3:14 pm
doodle wrote:
Sun Mar 14, 2021 3:05 pm
I don't see evidence that the US dollar is losing to any other currency..be that the Euro or Yen...it seems quite stable over last twenty years. Why do you think this is happening or inevitable?
I think the one most people are concerned about is the CNY. Projections about China's economy overtaking the US's in size as well as how well the economy has handled the impact of Covid may speed things up. If it wasn't for withholding taxes on their sovereign debt, I was looking at China government bonds because of the yield difference.

So its a 2 part issue, one is what currency is trade shifting to and I think you can argue for increasing trade being conducted in the Chinese currency. The second part will be what currency people and companies store their money in and right now the liquidity of US treasuries is still dominant not to mention the eurodollar market.

My question was at what point do shifts become material and if there was anything that can be done about it portfolio wise.
I've been reading some of Peter Zeihan's stuff, and it's pretty interesting how he paints a picture of China (and others) as being in very bad shape demographically, geographically, etc. Not only that, but how he makes the point that, without the Bretton Woods system and the American Navy, China would be a shadow of its current self. If other countries want to trade in something other than US dollars, the US has no reason to protect the planet, especially the oceans, with its military.

"Except for US Treasuries, what can you hold? Gold" You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion - $2 trillion [in new debt]. . . we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."
- Luo Ping, director-general at the Chinese Banking Regulatory Commission
You there, Ephialtes. May you live forever.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Mon Mar 15, 2021 8:15 pm

Let's start here on money...this works.

Unit of account Absolutely, no questions asked. Not even debatable in my view. That is NOT the same as saying the unit of account can't be changed for a different unit of account.

Mean of exchange Absolutely, no questions asked. This is why "money" is one of the greatest of all human inventions. We don't have to bring tens of semi trucks full of grain to the car dealer to buy a new car.

Store of value The truth/fallacy of this statement I think is completely time dependent in my view. An informed opinion on if something is a good store of value must take in a temporal view. Some simple illustrations I don't think anyone on this board could dispute if they simply look at the historical record of both.

Dollar...an outstanding store of value over the short term (think flight to the dollar during crises) and the candy bar I buy at the gas-n-go probably costs the same most every day for a while. A horrible store of value over the long term as in what is a single dollar worth if held over 50 years, not much.

Gold...a horrible store over value over the short term that can quickly lose a lot of its value as measured in more stable things. Gold also appears to be one of the best long term stores of value out there, nothing else really comes close that is actually "money".

The reality is that while conceptually these three are good theoretical explanations/definitions of money, in practice they are moving targets. By way of application let's look at each of them assuming we reside in the US.

The unit of account is the dollar...nothing else is legally recognized and literally everything has it as the denominator.

Mean of exchange is the dollar...almost, but not quite exclusively the means of exchange. Barter still happens, BTC, etc. really whatever two entities agree to. I'd argue 1s and 0s are in reality our modern mean of exchange. To me at a fundamental level it is mind blowing that I can tap my iphone on a plastic thingy in a grocery store and leave with food.

Store of value...well this is the thing we constantly debate right? The best stores of value have two properties. They are fixed in amount (e.g. physical/quantitative), they are recognized as being of worth (psychological/tangibly useful). The latter can make a huge difference. Think land in Saudi Arabia in 1899 vs. 1999 which could revert to 1899 by 2099.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Tue Mar 16, 2021 9:14 am

vincent_c wrote:
Mon Mar 15, 2021 10:39 pm

For the same reasons I also think that whether someone living in the US or not the actual short term expenditure is irrelevant to measuring the portfolio. I recognize that someone like MJ may have a different perspective in that he uses the USD as a measurement of gains and losses in the present, but I am just sharing my perspective and I wonder how many people would agree with my view.

I think there is an implicit assumption here that one wants to eventually consume savings and most of that occurs where you live. If that assumption is not accurate, then yes the "home" currency as a unit of measure doesn't matter as much, but I would think for most people it is the home currency that matters most.

So this temporal view of a store of value I think can be reconciled with what I am trying to say by splitting up funds into what is needed in the short term and what is not needed and managing them separately according to different unit of measurements. This is totally inline with why money that needs to be used in the short term should be in a savings account or t-bills only.

This is exactly the point and manifests itself a lot in retirement planning assumptions.

The whole discussion on CPI is to really try to understand why gold is money. It is probably because gold is global money and that as the US exports inflation gold is holding its value on average in the long term.

Not really germane, but it is demonstrably false that the US exports inflation. Inflation, deflation or stable is a function of the home currency primarily. Not saying the dollar being the global unit of measure doesn't impact it, but it's only a factor and not a dominant one.

Going back to the USD, I have always thought that interacting with any particular country necessarily exposes one to some degree of currency risk (you need another currency other than gold). Not only in terms of tax liabilities and spending but even when it comes to just investing in stocks and long term bonds, you have to choose a currency.

My view is that if it were possible you would construct a PP where you would weight all the parts of the PP according to the weighting in the SDR and then hold a basket of currencies that represented the SDR as well. I think the only reason the US PP is used is because it is less complicated. Thoughts?

Goes back to my previous point on the implicit assumption that consumption occurs where you live. What does such an approach really buy you other than currency risk which could be a tailwind or headwind? If you are a global citizen and travel a TON then ok, it probably makes sense. At the end of the day you have to chose your denominator for your unit of measurement. I think I would have a hard time making a good argument one way or another as to what someone should chose for their denominator, but if it isn't in your home country's unit of measure then as long as you are aware you are taking on currency risk who's to say that isn't a good decision? In Argentina it would be a great decision, in other places not so much.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Tue Mar 16, 2021 1:35 pm

I think you keep mixing up unit of account with store of value which is muddling up your responses.

Unit of account is for all practical purposes your home currency, end, period, dot. (I did note, there could be exceptions but for 99% of the planet it's their home currency. More accurately phrased, it is the currency where most of your consumption occurs and as impacted by your nation state's laws governing these things...so citizenship/home country is a factor that can't be escapted) Unless passing on wealth to "whomever" is going to remain forever not consumed, then unit of measure will eventually matter and whatever the unit of measure is at the time of consumption will pretty much "measure" how successful the approach was. The unit of measure is the "scoreboard." Hence, unit of measure.

HB, wrote about the above but not in the same way...the PP is always in the context of where you live (consume). You can't escape it (well maybe gazillionaires can, but most of us can not).

Switching to store of value, I think the points you make are valid.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Wed Mar 17, 2021 9:09 am

vincent_c wrote:
Tue Mar 16, 2021 3:09 pm
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
I think you keep mixing up unit of account with store of value which is muddling up your responses.
Why is it that I am the one that is mixing things up.

There is an assumption here that I am challenging which is this whole notion that for 99% of the planet it is their home currency.
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
Unless passing on wealth to "whomever" is going to remain forever not consumed
Why is this not a valid condition?
Kbg wrote:
Tue Mar 16, 2021 1:35 pm
well maybe gazillionaires can
What is the difference between someone with infinite money and someone who has X% of their money that will never be spent. I would argue that the X% should be managed in the same way as the person with infinite money.

Now the only other argument is that there is no need to manage money in that situation. But if we stipulate that the investor regardless wishes to maximize their portfolio in terms of their chosen unit of account, I don't see why one needs to confine themselves to their home currency.

Especially when we're trying to determine what is the best money for the PP, if money is to be a unit of account and store of value, then we should be able to come to a conclusion like for example "gold is the best form of money for the PP and the PP should only be measured in units of gold".
If you are going to challenge the notion, then bring some facts and evidence other than your opinion and try to convince the readers of the thread I'm not correct. For other readers let me be precise: Home currency is the one that matters as a unit of measure, because that is where one does the largest portion of their consumption and pays their taxes. This clearly would not apply for multi-national corporations that have significant chunks of their businesses in other countries AND do not want to repatriate earnings. If they do want to repatriate earnings, then home country matters again.

Why not a valid condition? I guess it depends on if you want to have a discussion on the extreme edge and one that likely only applies to institutions. My assumption is we were having a discussion about normal investors who have finite live spans and probably only think to their children's and grandchildren's lives.

If you have money in the "I have absolutely no need for this money" then yeah, manage it based on that premise. Those rules are different, but often rules that apply to that condition are really not good rules for more finite time periods.

So it appears we are deciding if we want to have a discussion about institutional money management vs. private investor needs and requirements.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Wed Mar 17, 2021 11:31 am

I'm probably getting too nerdy. Of note, I have not disagreed with anything you've said as applied to the store of value definition of money.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Thu Mar 18, 2021 8:45 am

vincent_c wrote:
Wed Mar 17, 2021 12:02 pm
I think I understand.

For all intents and purposes when we are trying to decide on how to invest in money as part of the PP then we are talking about money as a store of value.

However, a unit of account, is what is needed to measure the value of the portfolio at the present. This is basically saying what could the portfolio purchase today if we liquidated the entire position to spend and in that sense the home currency is the most appropriate measure.

Do I have it right?

If so, then the whole discussion of a unit of account is a red herring because the thing I was trying to decide is what money should be in the context of the PP. In any increasing timeframe other than the present, the unit of account becomes less and less relevant and the long term store of value becomes more and more important.

One thing that I have thought about is that even for someone with infinite funds, if they were a PP investor, anytime they are called to rebalance from cash into the other assets they are buying risk assets in that present. So this explains why cash in the PP is to be held in the unit of account because when you need to use it, it is in that moment.

So the PP diversifies between unit of account and store of money "money" by holding home currency cash and gold.

If we're in agreement, we can move on to whether gold is indeed the best store of money. I'm sure there is no disagreement by anyone that gold is a form of store of value and there is much disagreement on whether bitcoin is a store of value. I also mentioned that land is a store of value. So does anyone have any thoughts on how to deal with allocating to stores of value? Whether there is any need to diversify gold?
Yep you got it. Unit of measure does matter assuming one ever wants to consume. Hyperinflation is a great real world example of why this issue isn't a red herring.

However, I would completely agree that at the end of the day store of value is more important because if you have a good store of value then by definition the conversion to home currency won't be a big deal.

On liquidity, yep also agree. Anything that has a good market and is quickly convertible to something that enables you to immediately consume will suffice which in today's world is just about any paper or digital financial instrument. And of course there's good old fashioned paper money. I imagine there is other stuff out there as well I'm not familiar with.

OBTW...I use consume in the economics sense as opposed to savings which is delayed or future consumption. This actually is an important concept because it means that "money" has no practical use except for it's eventual conversion to something real that is then used/consumed. It is foundational to the concept of credit. The borrower receives immediate money for consumption and pays interest which the lender can use to increase future consumption.

But now we are back to store of value LOL and it is time to move on.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Thu Mar 18, 2021 8:53 am

So, on to store of value.

The data clearly indicates US paper money is not a good store of value over longer periods of time given the advent of centralized banking.

To me the interesting thing we should dive into is the balance between being a good store of value and stability/volatility of the asset. I suspect we will find the temporal dimension matters big time here.

I'd be interested in a discussion here that clarifies/illuminates when we might, for example, favor cash or gold and under what conditions. But for sure if there are other candidates that are good stores of value let's bring those into the discussion.
User avatar
Hal
Executive Member
Executive Member
Posts: 1349
Joined: Tue May 03, 2011 1:50 am

Re: Let's debate: Money

Post by Hal » Thu Mar 25, 2021 5:04 pm

Interesting discussion on Money - enjoy.
https://www.youtube.com/watch?v=-kx2-2m ... yj&index=6
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Let's debate: Money

Post by Kbg » Sun Mar 28, 2021 8:39 pm

v_c,

It appears the ball was in my court. :-)

Pretty much agree with most of your last longer post...what's to follow aren't counterpoints but simply "more stuff" to think about.

One thing were I strongly believe institutional investing principles and personal investing principles diverge, and should diverge, is when it comes to investing horizon/period. Our lives are finite and as a good working assumption shorter than institutions. Regardless, the principle that matters is duration of the savings period and the duration of the spending period. Thus, what may be a very good approach for one timeframe, may not be a good one at all for another timeframe. It may be useful for additional discussion to explicitly define one or two time periods so that we aren't making a ton of defacto assumptions that are really more time frame issues. (Side note: Somewhere on the board I think MachineGhost wrote a lot about assuming durations for the other assets. I know someone did, but it may not have been MG. Personally, I've never really bought into that approach as the behavior of the assets do not equate to the definition of duration, and going back to time unless I assume a lifetime longer than I'm likely to live that approach was of no practical value.)

On the PP as a unit of measure...sure that could be done. Pick your favorite CPI measure and that would be an easy approach (CPI vs. PP...one could subtract or divide depending on what one wanted to measure.) It doesn't have to be CPI, just anything that is real vs. nominal, broad based and has data available.

If you want to explore your last post...then I think you pick some comparatives and let the data speak for itself. (see the just above)

Personally, I never came to the board originally for HB politics and when it comes to financial stuff it's always about the numbers for me. So if you decide to explore the above, I'm happy to opine on what the numbers may mean. My gut says gold actually isn't going to do that well standalone, but I like your idea of the PP as the unit of accounting...that's an original thought and an intriguing one to explore I think.

Update...change gut to fact. No one in their right mind can objectively argue gold is a good store of value:

Evidence: 1980 to 2000. That's a two decade "F" for a store of value grade.
Post Reply