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the basis of international trade is actually the mutual agreement that money actually does represent value, and thus, wealth.

No, the basis of international trade is comparative advantage. International trade does not require that money retain its purchasing power any longer than it takes the exporter to exchange his foreign currency with the importer's domestic currency.

For the purposes of foreign trade, you only need money to retain its value for longer than that if you want to run an aggregate current accounts surplus. Which your trading partners have no particular obligation to support or encourage.

Running a trade surplus is a form of industrial subsidy. Other people don't have any obligation to pay your industrial subsidies.

And your proverbial Swabian Housewife does not have the money in her basement - she has it in the bank. Where she gets decent interest.

In other words, the state pays her a subsidy for doing fuck all with her money. That policy creates no wealth. Not a single meter of railway is built because she has money in the bank. Not a single ball bearing is cast because she has money in the bank. Not a single ship is launched because she has money in the bank. Money in the bank has, quite literally, no economic function until it is spent.

Tell me again why money in the bank should pay interest at all?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 14th, 2012 at 05:51:39 PM EST
[ Parent ]
you are abolishing any single element of basic economics.

That money in the bank is money the bank does lend to someone who needs money to create wealth. Economy needs credit.

And comparative advantage doesn't create trade any more than gravity creates rivers. Yes, it is a necessary precondition, but in real life, without money there is only very very limited trade actually happening.

Money is the abstraction of wealth and value, and a great facilitator for every kind of economics.

Denying money's existence or value is a sure sign of crackpot economics.

by cris0 on Tue Feb 14th, 2012 at 06:21:21 PM EST
[ Parent ]
Economy needs credit so credit is created. Then credit may circulate as money. But credit is a precondition for money, and not the other way around.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Tue Feb 14th, 2012 at 06:24:06 PM EST
[ Parent ]
That money in the bank is money the bank does lend to someone

Loanable funds fallacy.

In the real world, banks create credit when someone borrows from them. They then turn around and get the central bank to sign off on that credit, thus turning it into legal tender.

There is no reason, save atavistic tradition, to even house deposit-taking and lending in the same institution.

Money is the abstraction of wealth and value, and a great facilitator for every kind of economics.

Money is an abstract representation of state power. An important point of being a sovereign state is that you reserve the right to revoke this power from foreign parties (either through strategic default or inflation) arbitrarily and without notice.

That's what "sovereignty" means: That you reserve the right to revoke political commitments to foreign entities.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 14th, 2012 at 06:29:38 PM EST
[ Parent ]
Welcome to ET, cris0.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 15th, 2012 at 12:33:15 PM EST
[ Parent ]
See fallacy of composition.

The very first example from the above wiki link:

In Keynesian macroeconomics, the "paradox of thrift" theory illustrates this fallacy: increasing saving (or "thrift") is obviously good for an individual, since it provides for retirement or a "rainy day," but if everyone saves more, Keynesian economists argue that it may cause a recession by reducing consumer demand. Other economic schools, such as the Austrian School, disagree.[

The Austrian School appears to subscribe to a view of wealth similar to that of the mythical German Dragon Joseph Campbell described, which stayed in its cave guarding its horde of wealth, for which it had no conceivable use.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 15th, 2012 at 12:43:16 PM EST
[ Parent ]
The Austrian School, it should be noted, is not a school of economic thought, as it refuses as a matter of dogma to submit to empirical testing.

Insofar as economics is a scientific endeavor, therefore, Austrian moral theology does not qualify.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 15th, 2012 at 01:09:20 PM EST
[ Parent ]
Unfortunately that critique largely applies to all of "mainstream" economics, which considers itself a branch of moral philosophy and employs deductive reasoning from stated axioms.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 15th, 2012 at 01:23:18 PM EST
[ Parent ]

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