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subprime - it takes a cartoon to understand this stuff...

  • #41
  • Mar 11, 2008 4:34pm Mar 11, 2008 4:34pm
"dry"???? this is one of the most exciting discussions on the forum!

so i have a question for you guys regarding this debate.... is a bond considered wealth or money? like if i buy a 2year treasury, is that treasury bond considered wealth? and likewise, if i have 5mil in a savings account, is that account considered wealth or money?
Relax and be happy.
  • #42
  • Mar 11, 2008 9:11pm Mar 11, 2008 9:11pm
Quoting merlin
"dry"???? this is one of the most exciting discussions on the forum!

so i have a question for you guys regarding this debate.... is a bond considered wealth or money? like if i buy a 2year treasury, is that treasury bond considered wealth? and likewise, if i have 5mil in a savings account, is that account considered wealth or money?
My answer would be that the $5MM deposit and the bond are both purely financial assets, i.e. they are "moneylike" not "wealthlike." They both REPRESENT wealth and presumably could be exchanged for actual wealth.

But I can't eat the bond or live in it or sit on it (well, I guess I could sit on it . It has no intrinsic value; only perceived value. If I was alone on an island or if we were all trying to rebuild after some disaster, what good would dollar bills or bonds do anyone? None.

That's also the problem I have with people who talk about how gold has "real" value whereas other forms of money don't. Really? It has value? For what I ask ya? Consider this scene as I drive up to my local compound full of armed survivalists after some kind of apocalyptic collapse (which many gold bugs always seem to talk about).

Guy at gate with gun: Whoa... stop right there.

Me: Hi, can I come in and um, you know... survive with you cool dudes?

Guy at gate with gun: Maybe, maybe. What have you got that's useful?

Me: Like what?

Guy at gate with gun: Fuel? Food? Med supplies? Engineering skills?

Me: Err, well no but I have a TRUNKLOAD of GOLD!

GAGWG: Hmmm, so how's that working out for your gas mileage?

Me: Well, not so good. But can I use it to buy my way in?

GAGWG: Move on down the road buddy...
  • #43
  • Mar 11, 2008 9:22pm Mar 11, 2008 9:22pm
Quoting merlin
"dry"???? this is one of the most exciting discussions on the forum!

so i have a question for you guys regarding this debate.... is a bond considered wealth or money? like if i buy a 2year treasury, is that treasury bond considered wealth? and likewise, if i have 5mil in a savings account, is that account considered wealth or money?
Anything insured in gold is money. If you can guarantee to get it upon a few days notification, I'd say you have "money". Though considering that in most US banks you normally are not insured above the federal law limit, this is debatable. My chevy chase accounts for e.g are, I believe, safe up to 300 grand. After that, you and the bank robbers can duel it out in the street

If your savings account is not keeping up with inflation (hopefully your bonds are, but that too is uncertain) then you cannot call it "wealth" because it is decreasing in relative terms. This is why I don't like to call a single investment "wealth". Otherwise we have to come up with some definition of "wealth", different from my implicit one here, in order to meaningfully proceed.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #44
  • Mar 11, 2008 9:48pm Mar 11, 2008 9:48pm
Quoting capitalist88
... If I was alone on an island or if we were all trying to rebuild after some disaster, what good would dollar bills or bonds do anyone? None...
You could always burn 'em to keep warm if you were on that island.
And in a disaster, depending on how many you were holding, you could "trade" them as kindling with other survivors for other "now valuable" items...
which would give them "new" value after said disaster.

But, that just goes to prove your point, that indeed, they have no intrinsic value, only perceived value. And that that "value" does indeed change depending on the circumstances, environment... and climate

Sorry, just trying to make your points easier to understand for a economics dimwit like myself.
Carpe Divitiae
  • #45
  • Mar 11, 2008 10:37pm Mar 11, 2008 10:37pm
Quoting fsiltd
You could always burn 'em to keep warm if you were on that island.
And in a disaster, depending on how many you were holding, you could "trade" them as kindling with other survivors for other "now valuable" items...
which would give them "new" value after said disaster.

But, that just goes to prove your point, that indeed, they have no intrinsic value, only perceived value. And that that "value" does indeed change depending on the circumstances, environment... and climate

Sorry, just trying to make your points easier to understand for a economics dimwit like myself.

There's a huge problem with that. If i burned them as kindling, then I'd be able to start a fire. Then I'd be warm. Then I wouldn't be able to come onto this thread every few days and yell stuff like....



KINDLING MY FRIGID NORWEGIAN ASS!

:
  • #46
  • Mar 12, 2008 12:10am Mar 12, 2008 12:10am
Quoting capitalist88
There's a huge problem with that. If i burned them as kindling, then I'd be able to start a fire. Then I'd be warm. Then I wouldn't be able to come onto this thread every few days and yell stuff like....



KINDLING MY FRIGID NORWEGIAN ASS!

:

Granted. Your ass would be nice 'n toasty, and not frigid any more, but then again if that scenario actually played out... would this forum still be here?
Carpe Divitiae
  • #47
  • Mar 12, 2008 1:31am Mar 12, 2008 1:31am
capitalist, I completely agree with you on your outlook about gold. I fail to see how gold is better than paper money backed by "stuff". Gold being rare is simply not a good enough argument.

As far as the definition of wealth... well I think that depends on the context:

1. In the context of your post-apocalyptic "man at the gate with gun" scenario, the meaning of wealth changes completely. A trunk full of gold is worthless. The only things that have value are the basics needed to sustain life, because we suddenly have a shortage of these essentials.

2. In the context of your "lone man on an island" story, the same thing applies. Wealth would probably be the basics: the number of coconuts, wild pigs etc...

3. However, in the context of a complex, organized, law-abiding, capitalist society with an ability to easily produce a surplus of goods, I see how money can be equated with wealth. Our essentials are taken care of with very little effort, and we are free to focus on spoiling ourselves with our extra wealth. Nothing wrong with that I guess, as long as one believes the society is stable in its current form, which unfortunately cannot be guaranteed.
  • #48
  • Mar 12, 2008 12:29pm Mar 12, 2008 12:29pm
Quoting fierceman
capitalist, I completely agree with you on your outlook about gold. I fail to see how gold is better than paper money backed by "stuff". Gold being rare is simply not a good enough argument.

As far as the definition of wealth... well I think that depends on the context:

1. In the context of your post-apocalyptic "man at the gate with gun" scenario, the meaning of wealth changes completely. A trunk full of gold is worthless. The only things that have value are the basics needed to sustain life, because we suddenly have a shortage of these essentials.

2. In the context of your "lone man on an island" story, the same thing applies. Wealth would probably be the basics: the number of coconuts, wild pigs etc...

3. However, in the context of a complex, organized, law-abiding, capitalist society with an ability to easily produce a surplus of goods, I see how money can be equated with wealth. Our essentials are taken care of with very little effort, and we are free to focus on spoiling ourselves with our extra wealth. Nothing wrong with that I guess, as long as one believes the society is stable in its current form, which unfortunately cannot be guaranteed.

I used too many apocalyptic examples. I think wealth goes beyond just the essentials. Wealth is a health club, a chocolate shake, the Superbowl, a wide screen TV, a space shuttle and a moon colony. It doesn't even have to be physical. Wealth can be knowledge, experience, skills, the quality of art and literature, etc. In short it's anything that we as humans find INTRINSICALLY valuable.

And I agree that for all intents and purposes in a modern stable economy, my bank account and Merlin's US Treasury bond can be considered "wealth" on a personal level because we can always exchange those things for actual "stuff." But in a real sense, money, stocks, bonds and other financial assets are only "vouchers" for real actual wealth, and that's the distinction.

So why did I bring this all up in the first place? It goes back to the credit crisis explanation in the cartoon. The reason for this or any such crisis is that the players have lost track of the distinction between money and wealth. They think that money IS wealth.

So what happens? They get so involved with moving numbers around on a screen, creating derivatives on derivatives on derivatives, that they aren't thinking about the actual physical reality that all this stuff is supposed to represent. Behind every esoteric CDO, there's some guy who works behind the counter at Burger King who is trying to exchange the wealth that he's producing (spending 40-50 hours a week providing good service but questionable food to the public) for the wealth represented by a 3000 sf house with an in-ground pool and marble bathrooms.

The guy may be a great guy, but the equation just doesn't balance. The value we put on this guy's labor for a week is so small in relation to the value that we put on the house that it would take the guy 120 years to actually do enough work to equal the value of the house.

But the people pushing the numbers around on screens don't see the guy, they don't see the Burger King, and they don't see the house. If they did, they would never do the deal. But since they've forgotten that money isn't wealth, they've lost touch with the reality of what they're doing.

But we did get a funny cartoon out of it.
  • #49
  • Mar 12, 2008 1:09pm Mar 12, 2008 1:09pm
Quoting capitalist88
So what happens? They get so involved with moving numbers around on a screen, creating derivatives on derivatives on derivatives, that they aren't thinking about the actual physical reality that all this stuff is supposed to represent. Behind every esoteric CDO, there's some guy who works behind the counter at Burger King who is trying to exchange the wealth that he's producing (spending 40-50 hours a week providing good service but questionable food to the public) for the wealth represented by a 3000 sf house with an in-ground pool and marble bathrooms.

The guy may be a great guy, but the equation just doesn't balance. The value we put on this guy's labor for a week is so small in relation to the value that we put on the house that it would take the guy 120 years to actually do enough work to equal the value of the house.
brilliantly said my friend! i like the way you tie together the macro and micro. a lot of traders brush off ecnomomic principles, but these principles really do drive markets. when people get wrapped up in the detailed terms of a loan, for instance, they tend to forget the high level economics and math (ie shit in, shit out), and as this cartoon shows, that can lead to trouble! the same thing happens to traders!

as for my treasury bonds, thanks for taking a stab at that one guys i have always felt that owning a bond is considered wealth, because it has intrinsic value (which seems to be a good way to distinguish wealth from money). the US government owes me money, and unless there is a doomsday scenario, that is intrinsicly valuable. and if the US treasury defaults, that means i got bigger problems than losing money. i would probably be dead from radiation LOL.
Relax and be happy.
  • #50
  • Mar 12, 2008 1:11pm Mar 12, 2008 1:11pm
Quoting capitalist88
I used too many apocalyptic examples. I think wealth goes beyond just the essentials. Wealth is a health club, a chocolate shake, the Superbowl, a wide screen TV, a space shuttle and a moon colony. It doesn't even have to be physical. Wealth can be knowledge, experience, skills, the quality of art and literature, etc. In short it's anything that we as humans find INTRINSICALLY valuable.

And I agree that for all intents and purposes in a modern stable economy, my bank account and Merlin's US Treasury bond can be considered "wealth" on a personal level because we can always exchange those things for actual "stuff." But in a real sense, money, stocks, bonds and other financial assets are only "vouchers" for real actual wealth, and that's the distinction.

So why did I bring this all up in the first place? It goes back to the credit crisis explanation in the cartoon. The reason for this or any such crisis is that the players have lost track of the distinction between money and wealth. They think that money IS wealth.

So what happens? They get so involved with moving numbers around on a screen, creating derivatives on derivatives on derivatives, that they aren't thinking about the actual physical reality that all this stuff is supposed to represent. Behind every esoteric CDO, there's some guy who works behind the counter at Burger King who is trying to exchange the wealth that he's producing (spending 40-50 hours a week providing good service but questionable food to the public) for the wealth represented by a 3000 sf house with an in-ground pool and marble bathrooms.

The guy may be a great guy, but the equation just doesn't balance. The value we put on this guy's labor for a week is so small in relation to the value that we put on the house that it would take the guy 120 years to actually do enough work to equal the value of the house.

But the people pushing the numbers around on screens don't see the guy, they don't see the Burger King, and they don't see the house. If they did, they would never do the deal. But since they've forgotten that money isn't wealth, they've lost touch with the reality of what they're doing.

But we did get a funny cartoon out of it.
Alienation of the worker... hmm... maybe you should be "marxist88" hehe (just kidding).

Anyway, yes, wealth is all those things you mention like plasma TVs, yachts, Maseratis etc... and money covers a good deal of those things as long as we live in a society where we can exchange it for those things. If/when that society collapses into something along the lines of your apocalyptic examples, then we will have to redefine wealth or perhaps even forget about it completely .

However, I think wealth in skills, knowledge or art is a different type of wealth - I think we began talking about MATERIAL wealth here - so basically things that make our lives easier or more comfortable, or anything expensive that we can show off to our friends to make ourselves feel superior and them inferior (think Swarovski). That I think is the definition of material wealth in today's society.

I don't deny that there are other types of wealth as you mention, but those things are separate from material wealth to some degree (although knowledge and skills can lead to new products that would contribute to our every day comfort - I don't think that's what you meant).
  • #51
  • Mar 12, 2008 1:54pm Mar 12, 2008 1:54pm
Quoting fierceman
Alienation of the worker... hmm... maybe you should be "marxist88" hehe (just kidding).
Naahh, real capitalists have nothing against workers or working. Real capitalism is based on a single principle: "Unless I'm physically hurting someone or their property, threatening to do so, or defrauding them, leave me alone."

Quote
I don't deny that there are other types of wealth as you mention, but those things are separate from material wealth to some degree (although knowledge and skills can lead to new products that would contribute to our every day comfort - I don't think that's what you meant).


You hit the nail on the head. That IS what I mean. Wealth can consist of consumer goods or capital goods. Capital goods are used to create either consumer goods or other capital goods. In that sense, the knowledge of how to turn a river's current or the sun's rays into electricity is a type of capital good.

To determine if something is wealth, I ask myself a simple question: Can someone use the thing itself (without having to exchange it for something) to make anyone's life more enjoyable? If the answer is "yes" then it's wealth.

The fact that E=mc^2? Yep. So it's wealth.
An electric razor? yep.
A painting by Chagall? yep.
The song "Painting by Chagall?" yep.

A bond? Not so much. Because first I have to trade it for dollars. Then I have to trade those dollars for several boxes of Carnation Instant Breakfast Drink (yum).

Hmmm, how about this for a distinction: A muni bond may become worthless because the debtor can't pay. But that doesn't mean that the hospital, road, or bridge that it financed is worthless. That's a difference between a financial asset and real wealth.
  • #52
  • Mar 12, 2008 2:05pm Mar 12, 2008 2:05pm
Here's an interesting caveat to the last post. There are some ways financial instruments can actually have intrinsic value in and of themselves.

A bond is a form of legal instrument which may allow you to dictate terms to the issuer (if you're a big enough creditor) or even to take their stuff. Without this right (think foreclosure) the financial instrument has less value.

A stock gives you voting rights, so you can throw the directors of Microsoft out if you own enough shares.

Finally, when I worked at Fidelity, a rep would occasionally get a call from a customer who wanted to buy one share of Disney. Then they would ask us to do a transfer and ship, meaning that they wanted the actual certificate sent to them. Why? Because Disney's actual certs were a work of art. They had pictures of the characters on them and kids loved them. So parents would buy one share for their kids so they could have the certificate. It had value in and of itself. I don't know if Disney still issues these certs or not.
  • #53
  • Mar 12, 2008 2:25pm Mar 12, 2008 2:25pm
Quoting capitalist88
Because Disney's actual certs were a work of art. They had pictures of the characters on them and kids loved them.
I guess the title of the thread is right - it takes a cartoon to understand this stuff .

Actually Marx's idea of alienation of the worker and of Socialism is not anything like its real world manifestations either. Most people from capitalist societies are taught to be allergic to Marx, and never even bother giving him a chance, but in reality his ideas were just way ahead of their time. The most advanced capitalist societies nowadays are actually moving towards his model of economic democracy, perhaps without even knowing it.
  • #54
  • Mar 12, 2008 2:31pm Mar 12, 2008 2:31pm
Uh-oh, a socialism vs capitalism discussion.

I would say Marx was as naive about the world, about human beings, and their rights, as the capitalists you talk about. And if you've read the Manifesto, he pretty much scorns "socialism" in favor of "communism". Being forex traders, I think we better change the subject


Quoting fierceman
I guess the title of the thread is right - it takes a cartoon to understand this stuff .

Actually Marx's idea of alienation of the worker and of Socialism is not anything like its real world manifestations either. Most people from capitalist societies are taught to be allergic to Marx, and never even bother giving him a chance, but in reality his ideas were just way ahead of their time. The most advanced capitalist societies nowadays are actually moving towards his model of economic democracy, perhaps without even knowing it.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #55
  • Mar 12, 2008 3:03pm Mar 12, 2008 3:03pm
Turning the Hegelian dialectic concept of thesis, antithesis and synthesis on it's head by replacing its Platonic idealistic component with the materialistic component of Marx and Engels?


MY FRIGID NORWEGIAN ASS!!!! :
  • #56
  • Mar 12, 2008 3:15pm Mar 12, 2008 3:15pm
Quoting Plutonite
Uh-oh, a socialism vs capitalism discussion...Being forex traders, I think we better change the subject
See what I mean about being "allergic to Marx"?

Anyway, his earlier work is a little less extreme, but even in the Manifesto he doesn't abandon the idea of alienation of the worker. And who knows maybe even communism will have its day . The sun even shines on a dog's ass.

But seriously, I think his main downfall was that naivete you mention. He assumed that everyone is like him, but to be honest, some men have no intention of taking control of their destiny, and are perfectly content being cogs in the machine without even realizing it.
  • #57
  • Edited 7:08pm Mar 12, 2008 6:30pm | Edited 7:08pm
Hi All,
I hear many people here calling govt bonds wealth.
So If they may be so kind, that I would like to issue said some 20 year IOUs for your USD of any amount convenient at prevailing market discount.
Any takers?
So what are govt papers, isn't they just govt IOUs.
How is it that a promissory note be wealth is beyond my understanding. Once you convert your cold cash for a promissory note., you instantly, become a creditor of a debt. ie stakeholder of an asset upon maturity. God forbid that any unforeseen possibilities may happen to the debtor, you are left with banana wrappers.
For those who insist that bonds is wealth. I would really like to sell you some cambodian papers, if suits.
Even if nothing was to happen to the debtor, but if inflation should gallop within the tenure of hold, it becomes a depreciating asset aka a liability to holder. At best it can be considered deferred asset, but to qualify it for wealth i think is basically incorrect.

Gold is wealth. I qualify that it is wealth, simply because of its exchangability. That it is accepted and can be bartered or exchanged for goods and services, ANY WHERE in the world. Thereby making it, store of value ie wealth.

wealth:- has the ability to acquire goods and services on demand.

From WW2 USD has gained status to "Paper" Gold,(ie wealth) due to its abilities.
But in recent, "more paper than" gold status due to the US trade deficiency. so not wealth anymore.

On a more personal note, health is wealth. LOL

Just my 2 cts.

A,,, about governments, a... sorry, out of my league.
Only thing I can say is that a bad government is better than no government.

regards
  • #58
  • Mar 13, 2008 2:56am Mar 13, 2008 2:56am
Quoting fti
Even if nothing was to happen to the debtor, but if inflation should gallop within the tenure of hold, it becomes a depreciating asset aka a liability to holder.
How about TIPS then? With a NEGATIVE yield, I might add . What a joke.

But anyway, you pretty much hit it right on about inflation. That's what I was trying to say in my previous post about banks being able to lend money they don't have and when they (big surprise) get into trouble, then the Fed bails them out by printing more. "Socialism for the rich", as Jim Rogers would say. Losses are socialized through inflation, while gains are privatized.

And about gold it's the same thing. The dollar WAS wealth while it worked, and gold is wealth while it works, that is as you said, while it is exchangeable for "stuff". But the fact remains that gold has very little inherent value, that is value outside of a complex, organized, generally law-abiding society, and therefore it too can lose its status as "wealth".
  • #59
  • Last Post: Apr 1, 2008 7:58pm Apr 1, 2008 7:58pm
Quoting fti
Gold is wealth. I qualify that it is wealth, simply because of its exchangability. That it is accepted and can be bartered or exchanged for goods and services, ANY WHERE in the world. Thereby making it, store of value ie wealth.
i definitely see your point about bonds and their ability to lose all value. but bonds backed by the US treasury have close to zero default risk. in fact tbills are considered "risk less" in the financial world. sure there is interest rate risk, but even that can be avoided by buying short term bonds. i feel the zero default risk makes the bonds always "exchangeable" and therefore gives them inherent value. but this point can be debated either way, i dont see a clear and factual answer here. i would be on your side except i cant get away with the fact that a man who owns 10B in treasuries is most definetely wealthy in my eyes
Relax and be happy.
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