Money and boom-bust

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    1) When gold started to become a money from a barter economy, did the use of gold as a medium of exchange start to displace the uses of gold in other situations such as jewelry? What I am thinking is this: Right now, gold is primarily used for either commercial (jewelry, electronics, medicine, etc) and as something to hold. If gold were to start being used as a medium of exchange more widely, would it be “taken out” of commercial uses and holdings and used as money until the value of all uses is equalized? Why does the demand for gold as a use of money become greater than other uses when it starts to become a money?

    2) When it comes to the boom bust cycle due to artificially low interest rates, how can we know what is “the bubble”? In the 90s, we saw that the NASDAQ stock prices skyrocketed, but how exactly could we tell that it was “the bubble”? In the 2000s, we saw that housing prices were skyrocketing, but how could we tell that was “the bubble”? And what exactly is “the bubble” now?

    3) When it comes to the yield curve, we see that a recession usually comes when the yield curve is flat/inverted. Why exactly is this? Could a recession occur if the yield curve is not flat/inverted?


    (1) Arbitrage moves the supply of any good into its various uses and among its various users so that its price is uniform (for homogeneous units of supply) across all the uses. If the price were higher in one use as opposed to another, profit would exist for moving it out of the other use and into the profitable one. It’s an empirical question as to whether or not the demand for gold as money would be sufficient to draw gold out of other uses and into a monetary use.

    This story has a breakdown of the amount of gold in various uses:

    (2) The existence and timing of asset price bubbles is an historical, not theoretical, question. One cannot “know” when they exist. One can only make a judgment based on one’s entrepreneurial foresight. They can be known to exist ex post. What we can know about asset price bubbles theoretically is that they are caused by monetary inflation and credit expansion. We can use evidence of monetary inflation credit expansion, then, to guide our judgment concerning the existence and extent of asset price bubbles.

    (3) One argument is that as the crises arrives, entrepreneurs realize that demands will decline for their products. Their debt servicing, however, continues which squeezes their profit. In response, they shift away from long-term borrowing (so as not to increase their debt service) to short-term loans (so as to make up for lost sales revenue).

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