Money is just a commodity…

Slashdot reports on the gaining popularity of a virtual money in China:

It’s the QQ coin — online play money created by marketers to sell such things as virtual flowers for instant-message buddies, cellphone ringtones and magical swords for online games. In recent weeks, the QQ coin’s real-world value has risen as much as 70%. It’s the most extreme case of a so-called virtual currency blurring the boundaries between the online and real worlds — and challenging legal limits.

Someone comments:

Currency is just an agreement on a medium to symbolize value.

Common misconception, but one which governments are happy to foster. Actually, currency is a commodity in exactly the same way as coffee, bread, oil, gold, pork bellies.You see if currency were really a medium which symbolised value, it wouldn’t change much. Bread, coffee, gold etc would pretty much always cost the same, they would always have the same value throughout time. Instead what happens is that over time, everything becomes more expensive, inflation. What’s happening is that the currency is losing it’s value. It does that because there’s more of it; supply and demand. When the government(‘s bankers) print money, all the existing money in circulation decreases in value because there is more of it around.

So, no, there’s no fundamental difference between real and virtual money, just as there’s no fundamental difference between real money and a kg of coffee.

Except one thing: we imagine the government is able, through controlling the money supply, to smooth short-run business cycles. If the government doesn’t control the money supply, it can’t do this. So so-called virtual currencies undermine the power of monetary policy.

Labor contracts in the U.S., for example, usually cover a year, or more, and they’re denominated in dollars. Some people believe the government’s monetary power comes from the fact people write long-term contracts, like wage contracts, in the government controlled currency. So the government shouldn’t start sweating about “virtual” currencies until it starts seeing long-term contracts written in currencies it doesn’t control (…like stock options…).

9 thoughts on “Money is just a commodity…”

  1. Nice observation about contracts.

    Maybe this is more of an Econ 101 question, but isn’t part of the point of currency the idea that it has little to no intrinsic value? A paper bank note isn’t as useful as a gallon of oil or a loaf of bread; its value derives entirely from our shared belief in its value. To call it a commodity is misleading, unless I entirely misunderstand the definition.

    Example? Hyperinflation. Government X has contracts with workers and businesses to sustain state operations. Government X doesn’t take in enough revenue to cover said contracts. Government X prints cash to cover said obligations. Monetary supply swells, relative value of Xian Quatloos plummets, Xian plumbers start demanding payment in beef and vodka.

    Hm, I was just about to make a comment about stocks when I saw your last line. Also, why do people freak out about digital property when their bank account balances and property titles are every bit (no pun intended) as intangible?

  2. People hold a lot of cash (think of all the money that’s in checking accounts). Why do they do this? Its a really bad asset… they would be better off holding government bonds. You can assume people are irrational or you have to come up with a good rationalization…

    Its hard to imagine people would hold so much cash if there wasn’t a good reason for it. So money must have some intrinsic value. I think that’s what some people mean by ‘commodity’. Also, money used to be actual commodities like gold and silver.

    The government, in your example, is increasing the supply of money. Money acts like any other good when supply or demand change. What happens to the price of a good when its supply increases? BTW, what’s the ‘price’ of money?

    Hey, while I’m at it… why does controlling the money supply have an effect on business cycles? In your example, who in society loses when the government prints money? Who gains? What will this mean for the amount of investment in the economy? If investment changes, what happens to GDP?

    People that have assets denominated in dollars (or Quatloos), like labor contracts or bonds, lose and people who own real assets, like land or dividend paying stocks, win. If you’re in the former group, an increase in the money supply encourages you to become a member of the latter group. All of a sudden that new factory, a real asset, is looking like a pretty good investment. GDP rises.

    So by chasing people in in out of dollar denominated assets (aka nominal assets), the government can fine tune the GDP. If it thinks GDP is too high (because of irrational exuberance, I guess) then it can encourage people to buy nominal assets. If GDP is too low (because of we’re fearing fear itself, I guess) then it can chase people out of nominal assets.

    The government can’t do this fine tuning if no one holds assets denominated in dollars.

  3. Does liquidity count as an intrinsic value? I’m definitely guilty of hoarding cash, though I know that beyond a certain reserve, it’s not worth holding on to.

    Every time I read an account of hyperinflation, I’m surprised that the locals don’t abandon the currency and switch to a barter system/alternative currency sooner. Your inflation -> investment -> GDP growth example seems like it would tend to work as long as inflation is fast enough to be noticeable but slow enough that people won’t hang on to their assets instead of selling.

    Say the market is being flooded with quatloos such that the value is halved every week. You have a lot of cash, and think that a factory might be a better investment. I own a machine shop, and would be happy to sell you some machinery for your new factory. But, being a savvy business owner, I either want:
    1) Payment in goods: fuel, raw materials, luxury items, maybe one of your daughters.
    or 2) A really astronomical number of quatloos, since they will probably be worth a lot less by the time I can go shopping.

    There was a Levi’s TV spot in the early 90s. The catchphrase? “In Prague, you can trade them for a car.”

    Bad news for a government either way. We’re boned if they start trying to pay in services.

  4. Yeah, liquidity is an intrinsic value of money. That people don’t switch to barter systems is evidence of how much this aspect of money is worth. There’s famous stories about people carting wheel barrels full of cash to the grocery store in post-WWII Germany.

    Barter doesn’t just mean you have to haul around all your assets in case you decide to trade them. It also means if you want something someone else has, you have to have something he wants. If those people in Germany wanted groceries, they had to find grocers that wanted whatever they had. Since most people just have their labor as an asset, that the grocer only needs so many employees means not many folks would get groceries.

  5. That’s true of a currency during hyperinflation, though, too. Why should I sell you a box of apples for 1000 quatloos today when I can charge 3000 quatloos tomorrow? What discourages that choice other than the shelf life of the apples? I read an account of the (I think) Yugoslavian hyperinflation in the early 90s. One day, a reporter racked up a massive phone bill. He waited a few days, had his office wire him a few dollars, converted it to the local currency, and paid off the suddenly trivial fee.

    Actually, if holding cash is bad, I guess it’s much, much worse to be a creditor in those circumstances. You can spend the cash. Imagine buying out your mortgage with a day’s wages.

    I guess that’s why gold is (maybe foolishly) commonly treated as a fallback currency by many people. Since its scarcity is genuine, it’s much harder to inflate its value. Then again, the government loses so much of its regulatory leverage.

  6. Its hard to argue against a poster… not sure why the greens would be against the EU in general or the Euro in particular. I’d guess their dislike of the former induces their dislike of the latter, in which case they don’t have a case against the currency per se, just the organization that backs it.

    In that sense, it shows how the legitimacy of the currency is wrapped up in the legitimacy of the institutions backing it up.

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