The primary function of money is to be a medium of exchange.It is the oil that lubricates the economic engine.Other functions include store of wealth and a method of deferred payment,but no one has said that money itself should be a commodity when in fact our financial institutions have made it so.
The whole capitalist system works on the premise of low wages so profits can be made and thus traded in the share market,capital investments etc.

The sub-prime mortage debacle has stolen ordinary people's productivity and now there is a shortage of liquidity to keep the economic engine moving.Businesses will fail and people will lose their jobs and houses.Money is now a commodity which our financial institutions manipulate for profit thus distorting and perverting the functioning of the economic engine thus productivity.

The oil has become more important than the engine.What restrictions should we now be putting on our financial institutions to keep the balance right?

Arjay “The whole capitalist system works on the premise of low wages so profits can be made and thus traded in the share market,capital investments etc.”

That is wrong.

The capitalist system does not depend upon low wages.

The capitalist system of profit depends on the worth of output being greater than the cost of input.

The best way of doing that is to attain the optimum productivity from the resources dedicated to the production of the product or service which represent the saleable object.

I would sooner employ someone who is highly productive and pay them a higher wage than someone has low productivity on a lower wage.

“shortage of liquidity to keep the economic engine moving.”

The problem is not liquidity. The problem is risk

The risk profile of mortgage lenders has changed because the lent to riskier sub-prime borrowers.

The theory and observable practice for lending is – the riskier the borrower profile, the higher the necessary return (as well as the expected return) because of the greater risk of failure.

The issue with oil is, after many years of comparatively low oil prices, the current price has rocketed up. In the 1970’s when this happened the western economics reaction was far less organized and the resultant recession far harder. This time the reaction seems to have been are more measured. That can only lead me to assume that whilst many businesses are significantly cost dependent upon the cost of oil, their dependency is not so critical as it was in 1970’s and they have better plans in place to deal with any price fluctuation

Col you missed my point.My oil is money which lubricates the economic engine.Capitalists do look for the lowest wages.Why does most of the world's manufacturing happen in China and India?
I'm not passing judgement just looking at realities.Now should money be a commodity when it has no intrinsic worth?It only represents human potential.Should the banks alone be able to trade in human potential?

The major problem has been the loaning of too much money that has over inflated house prices in the US.The same has happened to a lesser degree here.These mortages were bundled up and sold to unsuspecting investors as safe investments.

There needs to be changes so our economies are not starved of money.

The premise upon which you base your question is fundamentally incorrect, Arjay.

>>no one has said that money itself should be a commodity when in fact our financial institutions have made it so.<<

Money is simply an exchange medium. If the Australian dollar has greater value than The US dollar at any point in time, people will sell US and buy Aussie.

The "value" is perceived, and analysed, more closely by Banks than, say, your average overseas holidaymaker, but the principle is the same.

If money was not freely traded, it would impact the entire economy, and not in a good way. Imagine for a moment you are exporting wheat in order to make your living. How would you receive payment for your product, if your currency is not exchangeable on the open market? There are plenty of examples of the chaos caused by institutionalized differences between the "official" rate and what people are prepared to pay on the black market.

Money is most certainly a commodity.

Different currencies have easily identifiable characteristics, that can be compared openly against each other. Your money - the stuff you either give to the bank for safe keeping or borrow from it to suit your needs - also has attributes that can be tabulated and assessed, giving the dollar you put into Super a different value to that which you borrow on your Visa card.

I suggest you read a little more broadly on the topic before blaming anyone - banks, Governments, capitalist bandits - for whatever ails you.

Arjay,

You whinge about the scarcity of the "lubricating oil" called money, but it hasn't disappeared, it was not burnt or dropped in the ocean - it simply changes hands.

You complain that "ordinary people" now have less of it:
it has indeed become ordinary to want to have everything RIGHT NOW and to even be willing to borrow in order to live beyond one's means. All those ordinary people went to the bank and freely signed their mortgage papers in full knowledge of the potential consequences - which they chose to ignore. Didn't they love their bank then?

Where is this money now? is it in the banks?
well let me tell you - some of your money is finding its way to my pocket, because I save and don't buy everything that I would have liked to have. I receive good interest from the bank and my superannuation is gaining with the bank's shares. This builds up my retirement plan so I hopefully don't need to work till my last day.

*Money is most certainly a commodity.*

I agree with Pericles on this one. We've dropped the gold
standard, today money is simply worth what the market dictates.
If Govts (like Zimbabwe for instance) keep printing more of
it, it soon loses its value dramatically.

The present shortage is due to fraud commited on Wall Street.
So nobody trusts nobody, until it's been exposed as to whom
has lost how much.

A bit of an economic downturn is not such a bad thing. We find
out who borrowed too much, who financially engineered all sorts
of things. As Warren Buffett says, its only when the tide goes
out that we see who is swimming naked.

Lets face it, things were getting out of hand. People were
paying ridiculous sums for houses, simply because somebody would
lend them the money. In that sense, money was losing its value.
Now its those who have been prudent with their risks, who will
benefit, as has always been predicted

Arjay, money cannot in the end be anything but a medium of exchange. But it's also gotta be a commodity-up to a point.

Those who rely on gambling a currencies future worth, gambling their worth against others' productivity etc deserve what they get.

As I've said before here- I can't wait not for the Carbon Trading market but the one that follows; the Carbon Trading Futures market, and whatever derivatves that follow. Get in on the ground floor.

money is a commodity because it has value
it should not be one....but it is because certain people get rich from it. it has value because it can be exchanged and has its own supply dynamic
re: the guy who said capitalism does not succeeed due to low wages - but input output blah
you are wrong entirely...
the main variable of input is the labour surplus
if it were not for that variable - all companies would not have any margin for profit - as all the other input variables become negligible over time - such as a new machine etc.
capitalism is ALL about the labour surplus

Arjay” Col you missed my point.My oil is money which lubricates the economic engine.”

Yes I did, in part. I apologise.

“Capitalists do look for the lowest wages.”

They look at the most cost effective, which is different. I do not see Boeing aircraft closing Seattle and moving everything to India, although they are skilling up parts of china for assembly work to secure the sale of aircraft to China, which is a common practice with aircraft supply.

The UK supplied the first batch of Harriers to USA then USA tooled up to manufacture the bulk of their demand under licence.

Pericles post has effectively summed up what “money” is.

Regarding “mortages were bundled up and sold to unsuspecting investors as safe investments.”

Two things

No investment is without risk.

Anyone buying a “dud” investment will invariably be more wary next time, hence the problems of refinancing lines of finance used to support mortgage providers.

Next thing will be less finance at higher rates, attracting fewer buyers into property and the high growth of the past few years will plateau and maybe even slip back. Such is the rhythm of finance. However, over the long term, the annual growth in house prices will remain at about 7%, pa compound, unless the state socialist governments find a stash of of 50,000 unused houses to flood onto the market.

As for being a commodity, of course it is, it has a value which one has to balance against its tendency to depreciate over time.

“Cash”, as the safest form of holding money, does not generate a strong return (basic risk profile) and will lose value relative to inflation if it is not converted into riskier mediums like property, shares, derivatives, futures, options etc.

You can't go past the inspired book if you want to find out about money or mammon. Money in itself is not evil but the love of it is. Often socialist fly around the world first class and then speak of the evils of capitalism. Socialist often get rich by capitalism and then preach to everyone else or even worse expect to live on welfare created by capitalism. A wise man realizes that naked he comes into the world and naked he will go out.

The mortgage crisis is no different from any other crisis in history which simply shows if we build our life upon anything or anyone other than Christ Jesus then that life will eventually crumble. It is more blessed to give than to receive. We who are so rich in this land that we need to be generous to the poor.

Well let's go a step further.Money in essence represents human potential.Even with all the gold,minerals and energy on the planet money means nothing without people making,servicing and consuming.

The real question is that how do we insure that this human potential is harnessed in the right direction so as to avert financial collapses such as our sub-prime debacles?The obivious problems both here and the US was the loaning of money to people who could ill afford to repay the debt and cope with rate rises.Either we educate people better at school about the market or we put restrictions on their ability to borrow cheap money for housing.

Today I see a very dubious trends emerging in regards global capitalists and our so called democratic Govts.In Aust we have such abundant energy and resources yet profit little from their exploitation.Natural gas is sold for 2C a litre to china and we pay 70C at the bowser.Now cheap energy underpins our living standards.The profits from our energy resources go to shareholders while most Aussies just manage to pay the bills and cannot save enough to enjoy the share market bonanza.

Now this is where Govt policy on taxing savings for the poor is seriously flawed.There is no incentive for people to save.

*The obivious problems both here and the US was the loaning of money to people who could ill afford to repay the debt and cope with rate rises*

Well the real problem was fraud. Banks let mortgage brokers flog
those loans and the mortgage brokers did not give a rats arse, as
long as they got their commissions. Those loans were then packaged
up and sold to investors as AAA rated. Investors around the world
have lost money, as geez whizz, they were not AAA after all, but
dud subprimes, sold to people who could not afford them.

I'm told that whoever rated them AAA can't be prosecuted for some
legal reason in the USA. If that is the case, then clearly the US
banking system can't be trusted, for those people should clearly be
in jail.

That is the problem right now. In NY, a major financial centre, nobody
trusts anybody. If nobody trusts anybody, nobody is going to lend
anyone money.

Runner “Socialist often get rich by capitalism and then preach to everyone else or even worse expect to live on welfare created by capitalism”

Well socialists have a tendency to balance the public self-righteousness with private bigotry, I remember how Graham Richardson got caught with his fingers in up the third knuckle, in his ill gotten gains in a hidden Swiss bank account, how Evans was similarly caught dipping his digits into Cheryl Kernow and I don't want to repeat where the late Bob Collins fingers were.

“shows if we build our life upon anything or anyone other than Christ Jesus then that life will eventually crumble.”

Yes well, tell that to the Egyptians, their pyramids seem to have been remarkably resilient.

As for “It is more blessed to give than to receive. We who are so rich in this land that we need to be generous to the poor.”

Yes and the meek shall inherit the earth, if that is ok with everyone else.

To be honest if you want to twitter on about your personal belief in economic theory then you are welcome but anyone who wants to subordinate business, government and commerce under the thumb of some theological clap-trap has as much relevance to this thread as some primitive Muslim academic criticizing the notion of interest because he read it on the outside of a box of Koran cookies.

All I know is the system which has been most successful at delivering opportunity and reward to individuals with which more of them can take responsibility for improving their own circumstances has been the libertarian-capitalist model which then accepts facilitates significant distribution into philanthropic endeavours and generates an increasing economic base for paying taxes to “render unto Ceasar”.

Yabby AAA rating, these things fluctuate over time, when creditability is damaged, then AAA is downgraded. The credibility of say, Enron was good once. It is no different to a horse, valued at a million dollars, until it falls and busts a leg.

Arjay “The real question is that how do we insure that this human potential is harnessed in the right direction so as to avert financial collapses such as our sub-prime debacles?”

It depends on what caused the sub prime collapse.

If the cause was some fraudulent endeavor,

then government, as regulator bears a responsibility to either enforce laws the curtail the fraud or as in most cases, enact new laws.

Typically Sarbane-Oxley is new regulation in USA partly in the wake of Enron to apply new regulation to the role of auditors. Just google it, there are heaps of links.

However, will all the will in the world, government is neither infallible nor predictive. All anti-fraud legislation is enacted reactive to given events and rarely in anticipation of a possible future new fraudulent risk and of course, the returns available to a fraudster are immense, relative to the effort and thus we are always going to have some fraud occurring.

If the cause was not fraud

Many causes can lead to any given event. Greed is one and stupidity another. Change of confidence or belief in something is another.

If we acknowledge that any endeavor has a “risk” some might even calculate a risk profile, which, based on historic observation expects the risk of going broke in a housing investment is less than going broke on a straight share investment and a lot less than anticipating commodity futures.

Many times the “risk” is rewarded with enhanced returns. Sometimes the risk comes in and someone loses their shirt.

And no one is ever going to fix that sort of event, whether a free market or otherwise.

No one can guarantee that all “human potential is harnessed in the right direction”.

If it could be, we could get rid of the fraudsters, the criminal courts who convict them and the prison system which houses them. And no one would pursue a legal commercial endeavour which comprises any “risk”.

Col, I agree, ratings can change and do. But in the case of the
subprime mortagages, they were never prime in the first place.

The problem is that financial engineering, ignoring risk, has grown
huge on Wall Street. Warren Buffett even concedes that derivatives
could be a financial tzunami. IMHO only a small portion of the
truth has come into the open so far.

A couple of interesting links from the Asian Times Online.
They have some great articles, with a different perspective,
as long as you can ignore the IMUVU ads, which seems to be
a popular pastime in Asia.

http://www.atimes.com/atimes/Global_Economy/JC19Dj01.html

and

http://www.atimes.com/atimes/Global_Economy/JC20Dj04.html

.

A very interesting discussion.Col Rouge and Yabby have made some very salient points in regards the reality of survival whether it be our present day economics or past experiences.
Like it or not money is a commodity which has the capacity to feed off itself and thus pervert the machinations of the real economy.

In my view,the poor need more incentive to save thus have more access to the wealth they have helped to create via the share market.

Arjay “In my view,the poor need more incentive to save thus have more access to the wealth they have helped to create via the share market.”

Saving is a result of having disposable income and a appropriate attitude. I might suggest most of the poor live virtually from day to day, week to week with no disposable income, all income being disposed of on necessaries. It is common for any potential “savings” to be diverted into cigarettes, alcohol etc.

Even if you fixed the economic level of disposable income to make savings a possibility, the “attitude” will still prevail to guarantee that many will not do so.

Whilst I do not like the idea that many are financially irresponsible, we do have a real problem and the only ways of fixing that I can think of are

A paternalistic, authorative state, which pretends it cares, can give out food stamps and rent vouchers to ensure the poor dispose of their income wisely.

An even more invasive state which manages the financial affairs of all, with the obvious curtailment of the not-so-poor and possibly wealthy as well as the poor.

Either option seems to me to present far more serious issues than what anyone may hope they resolve.

The attitude thing is the stumbling block. The state is not responsible for protecting people from their own foolishness and of it were, who would protect the able, as well as the foolish, from what the state deems to be “foolish”?

Sometimes it is better to acknowledge, the world is not a perfect place and the price required to attain perfection is simply not worth paying.

As you said, interesting discussion. We can all benefit from more of them :-)

Arjay, the poor do benefit from higher share prices through their
super funds, who effectively own most large Australian companies.

But I agree with you, the Australian system is flawed in that there
is little incentive to save cash, so people don't. That is why we
import so much finance from overseas, which is to our detriment as
a nation and one of the causes of higher interest rates.

If somebody saves their hard earned Dollars in a bank account,
inflation takes half the interest and marginal tax rates take the
other half. So people don't save cash for good reasons, hence our
problems.

If indexation was applied to interest from bank deposits, the system
would be much fairer and people would actually have an incentive to
bank some $. Hey presto, then our current account might also look
alot healthier then it does right now.