RGE - The problem with fair value calculations … JP Morgan, the dollar and China
リンク: RGE - The problem with fair value calculations … JP Morgan, the dollar and China
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The problem with fair value calculations … JP Morgan, the dollar and China
Brad Setser | Sep 19, 2006
Drausio Giacomelli’s model for long-term effective real exchange rates indicates that the yen is undervalued by 9%, just a shade more than the dollar – which is undervalued by 8%. The South African rand is also undervalued in his model, despite South Africa’s big current account deficit.
The Euro (and the Brazilian real) by contrast are overvalued … the euro by 8%, the real by even more.
Does Dr. Giacomelli (JP Morgan uber-strategist) really believe the dollar is currently undervalued? No. He isn’t Stephen Jen. He notes:
“significant current account adjustments in the US have been associated with 10-15% under valuations, meaning a EUR/ USD in a 1.30-1.35 range”
He should have said significant adjustments in the trade deficit. In the past, the trade deficit was basically the same as the current account deficit. No more – the income balance is set to deteriorate significantly, so keeping the current account deficit constant means that the trade deficit has to fall.
The problem with many of these kind of calculations (I don’t know if this applies to the JP Morgan model: I haven’t dug up the paper explaining its underlying structure and calculations of long-term real exchange rates can use different models that those models used to calculate "fair value") is that they assume that the average real exchange rate over say the last twenty or twenty-five years is close to the equilibrium exchange rate. Yet the US trade deficit has steadily widened over the last twenty-five years. It is unlikely that will continue for the next twenty-five years. It is more likely that the trade deficit will fall over the next twenty-five years … and the dollar will fall along with it.
China realizes this.
Fan Gang of the National Economic Research Institute (and China’s Monetary Policy Committee – he has taken Yu Yongding’s place) complains in an interesting policy paper: “The real question we should ask ... [is] why the US dollar has always got a tendency of devaluation against everyone else.”
Fan is taking the long view, looking back to 1970s. On a shorter horizon, it isn’t really true. The dollar rose significantly from 1995 to 2002.
But looking ahead, Fan correctly realizes that the dollar is likely to slip further.
Fan thinks the dollar’s international role pushes many of the costs of “loose” US policies on to the rest of the world:
“… no matter how much the US runs on fiscal deficits, no matter how loose the monetary policies, no matter much the excessive liquidity provided, it [the US] has less likely run into financial crises like any one else in the world would do. …. Meanwhile, being aware of not, other countries may face greater financial risks. The huge stock of (over supplied) financial assets denominated in us dollars moves around knocking on the doors of developing countries.”
Right now, as Fan no doubt realizes, those dollars are finding a home in China. Fan:
“The situation [Large US fiscal and current account deficits] is very challenging for the central banks of Japan, China, Korea, Taiwan and Singapore which collectively hold about US $2.8 trillion worth of US treasury bonds as part of their reserves. The moment that they reduce their purchase, the value of the dollar slips. Yet the more they buy, the more they are exposed to a potential free fall of the US dollar.”
Well said. The question is what China should do about it.
Fan certainly has a few ideas. But neither Fan nor Zhou makes policy. The State council does.
I think China hoped that if it demonstrated that if it showed its commitment to holding the pace of appreciation of the RMB below the RMB/ dollar interest rate differential, it could end hot money flows into China. And it thought that if it ended hot money flows, it would end pressure for appreciation.
Well, hot money flows did slow. But the current account surplus grew faster than hot money flows fell. The pace of China’s reserve accumulation did not slow. I have a feeling that China’s August reserve growth was shockingly large. The August trade surplus was close to $20b. That is a lot of dollars knocking on the door …
One thing that the Chinese policy makers might want to consider.
The strong Euro hasn’t slowed Europe’s recent growth. Europe did quite well over the past year. There actually are ways of creating jobs other than subsidizing foreign direct investment by holding your currency down …
Comments
there was a savant manque
of the 18th century who claimed he'd built a chess playing machine
in fact he had a dwarf inside the "machine"
i suspect al least metaphorically
this
mucDrausio Giacomelli’s model for long-term effective real exchange rates
has a dwarf inside it too
a proprietary dwarf
a dwarf no doubt
with a banking back ground
what fantastic humbug
btw do any south currency real forex values other then gold producers get cranked out of this
organ of powerful insight
of the 18th century who claimed he'd built a chess playing machine
in fact he had a dwarf inside the "machine"
i suspect al least metaphorically
this
mucDrausio Giacomelli’s model for long-term effective real exchange rates
has a dwarf inside it too
a proprietary dwarf
a dwarf no doubt
with a banking back ground
what fantastic humbug
btw do any south currency real forex values other then gold producers get cranked out of this
organ of powerful insight
Written by Gcs on 2006-09-19 16:41:29
The language in which Fan discusses the possibility of a return to the mold (okay, I'll just say it, gold) standard is certainly interesting.
Perhaps someone on this board who's a little more versed than I in the politics of monetary policy could answer a question: if we were to take such a step, what would be the best way to do it? If someone asked Brad and Nouriel to come up with a plan - probably not a plan B, but maybe a plan D or E - what might the result look like?
For example, would it have any resemblance to the minority report from 1982?
Perhaps someone on this board who's a little more versed than I in the politics of monetary policy could answer a question: if we were to take such a step, what would be the best way to do it? If someone asked Brad and Nouriel to come up with a plan - probably not a plan B, but maybe a plan D or E - what might the result look like?
For example, would it have any resemblance to the minority report from 1982?
Written by Anonymous on 2006-09-19 16:52:05
JP Morgan didn't include a calculation for China, whether out of diplomatic courtesy or because JP Morgan focuses on those currencies that trade actively.
Given the intellectual gulf between mold bug Ron Paul and Roubini and I, I rather doubt there would be much of a resemblance to the 82 minority report.
Fan's more intriguing suggestion is an asian currency unit ...
Given the intellectual gulf between mold bug Ron Paul and Roubini and I, I rather doubt there would be much of a resemblance to the 82 minority report.
Fan's more intriguing suggestion is an asian currency unit ...
Written by bsetser on 2006-09-19 17:33:38
Question for Brad.
A lot of people talk about a gold standard, something professor Roubini disdains. However, I hear almost nobody ever talking about an energy-based standard, yet we could easily establish such given a sufficient number of nuclear reactors and nuclear powered coal refineries. And given peak oil etc., I'm sure the Chinese and Japanese etc. would love to trade their t-bill toilet-paper for 10-20 year "energy bonds" with guaranteed redemption in energy. There are no physical or financial reasons why it could not be done, and given a lucid separation of ecological sanity from ecological hysteria, there are no real issues there either.
I've been doing a lot of research in this area, and it appears to be a real win-win scenario for everyone involved, vis a vis the banks, the energy industry, the foreign creditors, and the working stiffs who need good jobs. So I'm really curious as to why I don't hear any discussion of this option. Please comment.
A lot of people talk about a gold standard, something professor Roubini disdains. However, I hear almost nobody ever talking about an energy-based standard, yet we could easily establish such given a sufficient number of nuclear reactors and nuclear powered coal refineries. And given peak oil etc., I'm sure the Chinese and Japanese etc. would love to trade their t-bill toilet-paper for 10-20 year "energy bonds" with guaranteed redemption in energy. There are no physical or financial reasons why it could not be done, and given a lucid separation of ecological sanity from ecological hysteria, there are no real issues there either.
I've been doing a lot of research in this area, and it appears to be a real win-win scenario for everyone involved, vis a vis the banks, the energy industry, the foreign creditors, and the working stiffs who need good jobs. So I'm really curious as to why I don't hear any discussion of this option. Please comment.
Written by Rev. Tom on 2006-09-19 20:07:19
I sort of gathered that. Which is why I think the answer might be interesting.
(Actually I think the '82 report was pretty much ghosted by Murray Rothbard. Not that that changes much, gulfwise.)
To be fair, the question really makes no sense without a motivation. It's like if you asked Murray Rothbard what, if the FDA was to design a mandatory weekly menu for all Americans, we should all have for lunch on Wednesday. I'm sure one could find a way to make this question meaningful, but it would probably involve a lot of counterfactuals.
So imagine the following counterfactual scenario. Let's say a global liquidity glut was causing a sustained rise in the price of mold and other commodities whose supply is naturally bounded, to the point where savers worldwide were realizing that storing their savings as allocated lots of commodities (as opposed to futures, whose supply can greatly exceed the actual goods available for delivery, thus negating the effect of demand from savers on both price and inventory) might be broadly and sustainably preferable to exchanging the products of their labor for official debt, a commodity whose quantity seems to be increasing without bound.
In this scenario, the economy would be dependent on a continuing and even increasing flow of liquidity, that is, formally or informally guaranteed credit. The effect of the liquidity - that is, the desired effect of promoting real economic activity - would constantly diminish, because it would flow into commodities rather than the real economy, enriching only speculators. (I think we can all agree that enriching speculators is not desirable from either an ethical or political standpoint.)
Also affected might be non-fungible pseudocommodities, such as real estate, especially if individuals who choose to hold their savings in the form of aforementioned pseudocommodities receive favorable tax treatment and credit guarantees. In fact, the practical effect of this scenario might be that large investors held their savings in commodities and smaller ones held mainly pseudocommodities.
At a certain point in this process of accelerating dependency, cutting off new credit creation in one step, a la Volcker, becomes politically infeasible. Suppose, for the purposes of the thought-experiment, that the net financial position of the US was such that an instant end to liquidity creation would trigger a wave of bankruptcies that would make the Great Depression or the Japanese deflation look like a cocaine party.
One approach to this problem might be to try to frighten the commodity (and pseudocommodity) speculators by injecting noise into the liquidity stream. The goal would be to trigger a "soft landing" process by which liquidity could taper off gradually rather than sharply, without any panics or sharp currency adjustments. This would probably be accompanied by a parallel stream of jawbone activity. The goal would be a sharp drop in commodity prices and a softer drop in pseudocommodity prices, creating a general perception that a "bubble" had "burst," and that we can all stop worrying and love the bond.
There are three problems with this approach.
One is that if there is a formula for calibrating it, no one knows what that formula might be. In fact, if there was such a formula, the speculators would know it also. Historical evidence for soft landings is rather lacking. Therefore, the result is more likely to be a sharp recession.
Two is that since the same force (cheap and plentiful money) has been affecting commodity and pseudocommodity prices, blowing the speculators out of the water without inflicting massive collateral damage to the real (that is, politically nontrivial - speculators do not, in general, command a lot of votes) economy is a rather unlikely feat. In other words, true to their remorseless and rapacious natures, speculators in mold, oil, and other commodities are using the pseudocommodity market as a human shield. This leads to the same conclusion as objection one.
Three is that even if this strategy worked perfectly, it would only put us back in the Goldilocks economy of the '90s, and any political pressure to resolve the long-term secular imbalances would promptly evaporate. Not even the Chinese have a liquidity czar who is immune to the constant, plaintive cries from all sectors of the private and public sphere for more cheap credit now. The Fed has a certain amount of direct control over traditional bank lending, but this is a decreasing fraction of new credit creation.
This puts policymakers back in the same boat. They are all concerned about structural imbalances, but they all work for governments that are either democratic in the sense of holding popular elections, or are intensely concerned about popular unrest. They can all see how, in theory, a long, slow, and thorough course of fiscal and monetary spinach-eating could put the system back on track. But, since policy cannot trump politics, they do not have the power to impose this remedy and make it stick.
This is especially true because the rise of the Internet is decreasing the power of traditional media jawboning. Much better, and generally more pessimistic, economic analysis is available on the net than people could ever get in papers, radio and TV. When mass-market TV shifts to the Web this phenomenon may assume an ugly demotic nature, reminiscent of the original rise of broadcast. Both new truths and new lies may become widely believed.
So here is the point at which there might be a motivation for reconsidering mold: after the attempt to generate a soft landing creates a sharp recession in the US instead, possibly with some phenomena of panic, forcing a rapid U-turn in liquidity policy.
At this point, both policymakers and speculators, and perhaps even ordinary individuals, become aware that the last arrow has been shot. There is obviously no point in putting the economy through the wringer of another business cycle just to rein in the price of mold and other commodities. The speculative madness resumes and becomes even more intense. It starts to smell more and more like a currency run.
Then there are three options: (a) more of the same, (b) explicit price controls, and (c) moving the global financial system to an explicit commodity standard. Such as, for example, mold.
I assume that a political decisionmaker would want to be able to select any of the choices on this menu. So I'm curious about what the third option would look like.
(Actually I think the '82 report was pretty much ghosted by Murray Rothbard. Not that that changes much, gulfwise.)
To be fair, the question really makes no sense without a motivation. It's like if you asked Murray Rothbard what, if the FDA was to design a mandatory weekly menu for all Americans, we should all have for lunch on Wednesday. I'm sure one could find a way to make this question meaningful, but it would probably involve a lot of counterfactuals.
So imagine the following counterfactual scenario. Let's say a global liquidity glut was causing a sustained rise in the price of mold and other commodities whose supply is naturally bounded, to the point where savers worldwide were realizing that storing their savings as allocated lots of commodities (as opposed to futures, whose supply can greatly exceed the actual goods available for delivery, thus negating the effect of demand from savers on both price and inventory) might be broadly and sustainably preferable to exchanging the products of their labor for official debt, a commodity whose quantity seems to be increasing without bound.
In this scenario, the economy would be dependent on a continuing and even increasing flow of liquidity, that is, formally or informally guaranteed credit. The effect of the liquidity - that is, the desired effect of promoting real economic activity - would constantly diminish, because it would flow into commodities rather than the real economy, enriching only speculators. (I think we can all agree that enriching speculators is not desirable from either an ethical or political standpoint.)
Also affected might be non-fungible pseudocommodities, such as real estate, especially if individuals who choose to hold their savings in the form of aforementioned pseudocommodities receive favorable tax treatment and credit guarantees. In fact, the practical effect of this scenario might be that large investors held their savings in commodities and smaller ones held mainly pseudocommodities.
At a certain point in this process of accelerating dependency, cutting off new credit creation in one step, a la Volcker, becomes politically infeasible. Suppose, for the purposes of the thought-experiment, that the net financial position of the US was such that an instant end to liquidity creation would trigger a wave of bankruptcies that would make the Great Depression or the Japanese deflation look like a cocaine party.
One approach to this problem might be to try to frighten the commodity (and pseudocommodity) speculators by injecting noise into the liquidity stream. The goal would be to trigger a "soft landing" process by which liquidity could taper off gradually rather than sharply, without any panics or sharp currency adjustments. This would probably be accompanied by a parallel stream of jawbone activity. The goal would be a sharp drop in commodity prices and a softer drop in pseudocommodity prices, creating a general perception that a "bubble" had "burst," and that we can all stop worrying and love the bond.
There are three problems with this approach.
One is that if there is a formula for calibrating it, no one knows what that formula might be. In fact, if there was such a formula, the speculators would know it also. Historical evidence for soft landings is rather lacking. Therefore, the result is more likely to be a sharp recession.
Two is that since the same force (cheap and plentiful money) has been affecting commodity and pseudocommodity prices, blowing the speculators out of the water without inflicting massive collateral damage to the real (that is, politically nontrivial - speculators do not, in general, command a lot of votes) economy is a rather unlikely feat. In other words, true to their remorseless and rapacious natures, speculators in mold, oil, and other commodities are using the pseudocommodity market as a human shield. This leads to the same conclusion as objection one.
Three is that even if this strategy worked perfectly, it would only put us back in the Goldilocks economy of the '90s, and any political pressure to resolve the long-term secular imbalances would promptly evaporate. Not even the Chinese have a liquidity czar who is immune to the constant, plaintive cries from all sectors of the private and public sphere for more cheap credit now. The Fed has a certain amount of direct control over traditional bank lending, but this is a decreasing fraction of new credit creation.
This puts policymakers back in the same boat. They are all concerned about structural imbalances, but they all work for governments that are either democratic in the sense of holding popular elections, or are intensely concerned about popular unrest. They can all see how, in theory, a long, slow, and thorough course of fiscal and monetary spinach-eating could put the system back on track. But, since policy cannot trump politics, they do not have the power to impose this remedy and make it stick.
This is especially true because the rise of the Internet is decreasing the power of traditional media jawboning. Much better, and generally more pessimistic, economic analysis is available on the net than people could ever get in papers, radio and TV. When mass-market TV shifts to the Web this phenomenon may assume an ugly demotic nature, reminiscent of the original rise of broadcast. Both new truths and new lies may become widely believed.
So here is the point at which there might be a motivation for reconsidering mold: after the attempt to generate a soft landing creates a sharp recession in the US instead, possibly with some phenomena of panic, forcing a rapid U-turn in liquidity policy.
At this point, both policymakers and speculators, and perhaps even ordinary individuals, become aware that the last arrow has been shot. There is obviously no point in putting the economy through the wringer of another business cycle just to rein in the price of mold and other commodities. The speculative madness resumes and becomes even more intense. It starts to smell more and more like a currency run.
Then there are three options: (a) more of the same, (b) explicit price controls, and (c) moving the global financial system to an explicit commodity standard. Such as, for example, mold.
I assume that a political decisionmaker would want to be able to select any of the choices on this menu. So I'm curious about what the third option would look like.
Written by Anonymous on 2006-09-19 20:15:16
‘Tis true the dollar rose strongly in 1995-2002, 36.9% against a euro proxy and 33.2% vis-à-vis the yen.
However, that came after a decade of the dollar doing a fine imitation of a rock trying to learn how to swim: -33.5% against the pseudo euro (1984-94) and 56.9% on the yen.
What goes down, in this case, must come up.
* * *
“Fan certainly has a few ideas. But neither Fan nor Zhou makes policy. The State council does.”
The CCP Politburo Standing Committee is the locus of significant decision making. Even more so since Zhu Rongji is no longer throwing around his considerable clout around the State Council. PM Wen Jiabao just doesn’t have the mojo that Zhu did. However, on technical issues like this one (if it involves the value of the currency or forex reserves it is technical), the political heavyweights would likely listen to the PBoC money technicians.
“The strong Euro hasn’t slowed Europe’s recent growth.”
Theoretically, that’s true. However, to consider policy options in post-industrial, heavily regulated, taxed-to-the-eyebrows, parliamentary democracy Europe as having relevance to China is stretching it much, much too far.
* * *
Asian currency union . . . that would assume an agreement between China and Japan over who’s in charge, and some sort of decision on how to treat Taiwan.
Ain’t gonna happen in my lifetime.
Side track: Asia isn’t a continent the way that Europe, Africa or the Americas are. The jungles, mountains and seas prevented deep and long interaction akin to Europe. There is no single dominant religion, no common root language and certainly no continent-spanning transport system. Standards of living scrap both ends of the spectrum, as do population sizes, regulatory regimes and governmental institutions. Think Burma vs. Hong Kong, Japan vis-a-vis India or Singapore against China.
Asia is that which doesn’t fit into the other continents, which is strictly a Western view.
However, that came after a decade of the dollar doing a fine imitation of a rock trying to learn how to swim: -33.5% against the pseudo euro (1984-94) and 56.9% on the yen.
What goes down, in this case, must come up.
* * *
“Fan certainly has a few ideas. But neither Fan nor Zhou makes policy. The State council does.”
The CCP Politburo Standing Committee is the locus of significant decision making. Even more so since Zhu Rongji is no longer throwing around his considerable clout around the State Council. PM Wen Jiabao just doesn’t have the mojo that Zhu did. However, on technical issues like this one (if it involves the value of the currency or forex reserves it is technical), the political heavyweights would likely listen to the PBoC money technicians.
“The strong Euro hasn’t slowed Europe’s recent growth.”
Theoretically, that’s true. However, to consider policy options in post-industrial, heavily regulated, taxed-to-the-eyebrows, parliamentary democracy Europe as having relevance to China is stretching it much, much too far.
* * *
Asian currency union . . . that would assume an agreement between China and Japan over who’s in charge, and some sort of decision on how to treat Taiwan.
Ain’t gonna happen in my lifetime.
Side track: Asia isn’t a continent the way that Europe, Africa or the Americas are. The jungles, mountains and seas prevented deep and long interaction akin to Europe. There is no single dominant religion, no common root language and certainly no continent-spanning transport system. Standards of living scrap both ends of the spectrum, as do population sizes, regulatory regimes and governmental institutions. Think Burma vs. Hong Kong, Japan vis-a-vis India or Singapore against China.
Asia is that which doesn’t fit into the other continents, which is strictly a Western view.
Written by DOR on 2006-09-19 20:35:15
Rev Tom,
The tolerance for dissenting perspectives on this blog is remarkable and is a tremendous credit, I think, to its proprietors. However, I fear referring to Treasury bonds as "toilet paper" may be a little over it. And even if it's not, don't you catch more flies with honey than with napalm?
It is worth thinking seriously about energy as a currency. One of the reasons for this is that the main motivation for sticking to precious metals as commodity currencies, the idea that there should be circulating coins made of that metal, is silly in the 21st century. Electronic currencies (google "James Turk") are the future, and an electronic instrument can command a lot of any commodity you can store.
However, energy as a currency has the following problems that I can think of.
One, storage costs for most forms of energy are nontrivial. I have heard oil storage costs of $2 per barrel per year - perhaps someone can correct me.
You might say: why does an energy note have to be backed by oil in a storage tank? Surely it can be backed by - as you say - a future? Yes, but the problem is who guarantees the future. The value of the future is the amount of commodity it promises to deliver, multiplied by the probability that the future will not, in fact, be delivered. In other words, the counterparty risk.
You might say: that's no problem, we'll have the government guarantee the counterparty risk. The problem is: which government? Why should you trust that particular institution? Why do you assume that it won't guarantee far more futures than it can ever in practice deliver? If it does, we are right back to fiat currency. Even the classical mold standard was a form of fiat currency in just this sense, because central banks issued far more notes than they could ever redeem. Many great things have been done with fiat currency, but if we're talking about rebooting the entire global financial system, we might as well go back to actual sound money, Bank of Amsterdam style.
A second problem is that there are a lot of different forms of fossil energy, and they are not fungible. What should the exchange rate between natural gas and Brent crude be? Which commodity should you keep your accounts in? If you pick one form of energy, it will be overvalued and the rest undervalued, resulting in economic weirdness that I don't even want to try to think about. If you try and standardize against them all in some sense, you are more or less recreating the problems that used to exist with the bimetallic ratio between mold and silver. Except now, instead of two commodities, you have, like, a zillion.
It might be helpful to go back to the origin of money. Why does money exist? Why do we have such a thing?
Money exists for two reasons. First, as Carl Menger pointed out, it solves the problem of indirect exchange. Second, it provides a repository for savings. Most products of human labor are not readily amenable to long-term storage. Therefore, people have an intrinsic motivation to exchange the goods they create for goods that are storable.
The first criterion implies that money will be a commodity. The second implies that it will be overvalued - that is, that it will be demanded more than it would otherwise be, if it was not suitable as a repository of savings.
This overvaluation effect creates an incentive to standardize. As a saver, it is profitable to be the first to move your savings into the good that others are likely to choose as a means of saving. The effect is a feedback loop that reaches equilibrium only when one good is "money" and all others return to their intrinsic exchange value absent the savings effect.
It strikes me as likely that this force would reduce a standard defined in terms of multiple forms of energy to one defined in terms of one form of energy, much as it may have been culpable in reducing the bimetallic standard to the classical mold standard (a complex political process to be sure). But, of course, it could also reduce a standard based on energy to one not based on energy.
Finally, the third problem is that the new demand that appears when savings shift into a commodity has, of course, an effect on the price and hence inventory of that commodity. This effect can be anticipated and thus tends to influence the choice of savers. A commodity which is easy to produce, such as pork bellies, does not make a good repository of savings for this reason.
Oil (for example) is definitely way ahead of pork bellies in terms of inelastic supply. But since it has never been tested for its elasticity as a monetary commodity, the results are unclear. For example, there are a number of processes for producing synthetic oil, which might become profitable under an oil standard, resulting in very weird effects. While a return to the mold standard might leave people digging up graveyards for dental mold, the general difficulty of finding and extracting more mold, in proportion to the vast quantity that has already been mined in the course of human history, is probably the main point in its favor against all other commodities, including other precious metals.
The tolerance for dissenting perspectives on this blog is remarkable and is a tremendous credit, I think, to its proprietors. However, I fear referring to Treasury bonds as "toilet paper" may be a little over it. And even if it's not, don't you catch more flies with honey than with napalm?
It is worth thinking seriously about energy as a currency. One of the reasons for this is that the main motivation for sticking to precious metals as commodity currencies, the idea that there should be circulating coins made of that metal, is silly in the 21st century. Electronic currencies (google "James Turk") are the future, and an electronic instrument can command a lot of any commodity you can store.
However, energy as a currency has the following problems that I can think of.
One, storage costs for most forms of energy are nontrivial. I have heard oil storage costs of $2 per barrel per year - perhaps someone can correct me.
You might say: why does an energy note have to be backed by oil in a storage tank? Surely it can be backed by - as you say - a future? Yes, but the problem is who guarantees the future. The value of the future is the amount of commodity it promises to deliver, multiplied by the probability that the future will not, in fact, be delivered. In other words, the counterparty risk.
You might say: that's no problem, we'll have the government guarantee the counterparty risk. The problem is: which government? Why should you trust that particular institution? Why do you assume that it won't guarantee far more futures than it can ever in practice deliver? If it does, we are right back to fiat currency. Even the classical mold standard was a form of fiat currency in just this sense, because central banks issued far more notes than they could ever redeem. Many great things have been done with fiat currency, but if we're talking about rebooting the entire global financial system, we might as well go back to actual sound money, Bank of Amsterdam style.
A second problem is that there are a lot of different forms of fossil energy, and they are not fungible. What should the exchange rate between natural gas and Brent crude be? Which commodity should you keep your accounts in? If you pick one form of energy, it will be overvalued and the rest undervalued, resulting in economic weirdness that I don't even want to try to think about. If you try and standardize against them all in some sense, you are more or less recreating the problems that used to exist with the bimetallic ratio between mold and silver. Except now, instead of two commodities, you have, like, a zillion.
It might be helpful to go back to the origin of money. Why does money exist? Why do we have such a thing?
Money exists for two reasons. First, as Carl Menger pointed out, it solves the problem of indirect exchange. Second, it provides a repository for savings. Most products of human labor are not readily amenable to long-term storage. Therefore, people have an intrinsic motivation to exchange the goods they create for goods that are storable.
The first criterion implies that money will be a commodity. The second implies that it will be overvalued - that is, that it will be demanded more than it would otherwise be, if it was not suitable as a repository of savings.
This overvaluation effect creates an incentive to standardize. As a saver, it is profitable to be the first to move your savings into the good that others are likely to choose as a means of saving. The effect is a feedback loop that reaches equilibrium only when one good is "money" and all others return to their intrinsic exchange value absent the savings effect.
It strikes me as likely that this force would reduce a standard defined in terms of multiple forms of energy to one defined in terms of one form of energy, much as it may have been culpable in reducing the bimetallic standard to the classical mold standard (a complex political process to be sure). But, of course, it could also reduce a standard based on energy to one not based on energy.
Finally, the third problem is that the new demand that appears when savings shift into a commodity has, of course, an effect on the price and hence inventory of that commodity. This effect can be anticipated and thus tends to influence the choice of savers. A commodity which is easy to produce, such as pork bellies, does not make a good repository of savings for this reason.
Oil (for example) is definitely way ahead of pork bellies in terms of inelastic supply. But since it has never been tested for its elasticity as a monetary commodity, the results are unclear. For example, there are a number of processes for producing synthetic oil, which might become profitable under an oil standard, resulting in very weird effects. While a return to the mold standard might leave people digging up graveyards for dental mold, the general difficulty of finding and extracting more mold, in proportion to the vast quantity that has already been mined in the course of human history, is probably the main point in its favor against all other commodities, including other precious metals.
Written by Anonymous on 2006-09-19 20:58:25
I am with DOR on an Asian currency unit. First let's see if Italy can stay in the euro.
Surely the only use of a fiat currency unit is to provide a lever for monetary policy (to counteract Keynes' "animal spirits," an idea which given the size and nimbleness of today's political systems makes about as much sense as hunting grouse with an M-1 tank, but which certainly can't be ruled out on logical grounds alone), and the concept of policy makes no sense without politics. It is very hard for me to see how any unit not tied to a real political base could avoid the fate of the SDR.
Actually, what I find more intriguing in the Fan memo is its suggestion that there could be some kind of intermediate solution between fiat and commodity currency. If he is thinking of anything in particular, I have no idea what it might be.
Surely the only use of a fiat currency unit is to provide a lever for monetary policy (to counteract Keynes' "animal spirits," an idea which given the size and nimbleness of today's political systems makes about as much sense as hunting grouse with an M-1 tank, but which certainly can't be ruled out on logical grounds alone), and the concept of policy makes no sense without politics. It is very hard for me to see how any unit not tied to a real political base could avoid the fate of the SDR.
Actually, what I find more intriguing in the Fan memo is its suggestion that there could be some kind of intermediate solution between fiat and commodity currency. If he is thinking of anything in particular, I have no idea what it might be.
Written by Anonymous on 2006-09-19 21:13:21
Gold is a horrible currency because its quantity changes slowly, yet unpredictably. If population increases 3%, but gold increases 2%, there's automatic deflation.
But as bad as gold is, energy is even worse, since it can be metaphorically created or destroyed unpredictably. For example, after Three Mile Island, no one wanted to build reactors in the US. Fuel was worthless. But if someone figured out how to do fusion, especially without the nasty isotopic soup, it would be the equivalent of flooding the market with dollars.
Charles of MercuryRising
http://www.phoenixwoman.blogspot.com
But as bad as gold is, energy is even worse, since it can be metaphorically created or destroyed unpredictably. For example, after Three Mile Island, no one wanted to build reactors in the US. Fuel was worthless. But if someone figured out how to do fusion, especially without the nasty isotopic soup, it would be the equivalent of flooding the market with dollars.
Charles of MercuryRising
http://www.phoenixwoman.blogspot.com
Written by Charles on 2006-09-20 00:43:38
Charles,
Here is annual gold production for the last hundred years.
You seem a little confused on money and prices. To rational actors, the quantity of money does not matter, only its distribution. "Deflation" can mean either falling average prices across an economy, which is generally a good thing - for example, the falling price of transistors - or the destruction of apparent wealth due to price changes - for example, the falling price of land in Japan in the 1990s. The latter is certainly not a good thing, but it is not caused by a simple numerical disparity between babies born and money printed.
I recommend this, especially chapter 4.
Here is annual gold production for the last hundred years.
You seem a little confused on money and prices. To rational actors, the quantity of money does not matter, only its distribution. "Deflation" can mean either falling average prices across an economy, which is generally a good thing - for example, the falling price of transistors - or the destruction of apparent wealth due to price changes - for example, the falling price of land in Japan in the 1990s. The latter is certainly not a good thing, but it is not caused by a simple numerical disparity between babies born and money printed.
I recommend this, especially chapter 4.
Written by Anonymous on 2006-09-20 01:17:06
"It is worth thinking seriously about energy as a currency." Didn't HG Wells propose electricity as a currency 100 years ago?
“The real question we should ask ... [is] why the US dollar has always got a tendency of devaluation against everyone else.” It's not the US dollar per se; it's the natural tendency of any reserve currency to devalue. It is bid up because people want to hold it and gives the illusion of wealth; then it goes down once it's no longer being bid up.
“The real question we should ask ... [is] why the US dollar has always got a tendency of devaluation against everyone else.” It's not the US dollar per se; it's the natural tendency of any reserve currency to devalue. It is bid up because people want to hold it and gives the illusion of wealth; then it goes down once it's no longer being bid up.
Written by a on 2006-09-20 06:30:35
"It is worth thinking seriously about energy as a currency." Didn't HG Wells propose electricity as a currency 100 years ago?
“The real question we should ask ... [is] why the US dollar has always got a tendency of devaluation against everyone else.” It's not the US dollar per se; it's the natural tendency of any reserve currency to devalue. It is bid up because people want to hold it and gives the illusion of wealth; then it goes down once it's no longer being bid up.
“The real question we should ask ... [is] why the US dollar has always got a tendency of devaluation against everyone else.” It's not the US dollar per se; it's the natural tendency of any reserve currency to devalue. It is bid up because people want to hold it and gives the illusion of wealth; then it goes down once it's no longer being bid up.
Written by a on 2006-09-20 06:30:35
Hi Brad,
The endless debate blaming the supposedly undervalued Chinese yuan for the US Current Account deficit is utterly disconnected to economic reality. "The argument that the RMB is undervalued is questionable," says Friedrich Wu, an economist at the National University of Singapore's East Asian Institute.
"Whether a currency is too strong or too weak is a function of your perspective," says Stephen Jen, London-based head of global currency research at Morgan Stanley. "You can look at it from the perspective of China's trade surplus (the RMB is too weak), or China's financial sector (the RMB is too strong), from the perspective of Shanghai (the RMB is too weak), or from Guaizhou (the RMB is too strong). That is why currency valuation is so subjective."
Moreover, why not just completely ignore the dysfunctional US Federal Reserve monetary policies that promote serial Assets Bubbles, the Dot-con bubble immediately followed by the Housing Bubble. The US Current Account Deficit with the entire world is closely associated with consumer overspending and the misallocation of capital in the US Economy from Federal Reserve monetary policies. How many more McMansion Houses do the Federal Reserve governors think the US Economy will require?
Regards,
Written by Dave Chiang on 2006-09-20 06:41:22
Question being how is are any of these 'alternatives' priced without the USD as the international standard?
Written by Guest on 2006-09-20 06:42:01
Much of the real estate in North America is being bid up by Chinese and other 'foreigners' who are looking for places to store their wealth in places where it won't be expropriated and their property rights in general are more secure.
Perhaps the rural poor Chinese wouldn't need jobs if they were appropriately compensated for the value of the property that has been taken from them.
Perhaps the rural poor Chinese wouldn't need jobs if they were appropriately compensated for the value of the property that has been taken from them.
Written by Guest on 2006-09-20 06:51:32
I agree with anonymous' discourse on the difficulty with an energy standard.
A currency based on liters in a barrel of oil is possible, but unless you assume that the real price of oil is gonna suddenly stabilize, it implies large changes in other prices ... nuclear energy is good for making electricity, but electricity is hard to store or trade (internaitonally). And why would the US -- the current hegemon -- want to allow the world's monetary policy to be made by the country with the most supply of the commodity selected as the basis for the world's money ...
DOR -- standing committee of the Politburo, eh -- wow, China really is a communist country ... institutionally at least.
Stephen Jen (oops, I meant David Chiang) ...
I would ask "how many more McMansion houses" does the PBoC think the US economy will require. Look at Chinese purchases of Agencies and MBS. If you believe that US monetary policy has been rather expansionary (money growth has actually been restrained recently in the uS, me thinks), the PBoC has played a big role turning that epansionary monetary policy into demand for McMansions ... expansionary monetary policy = demand for imports = Chinese surpluses = Chinaes reserve growth = Chinese demand for MBS/ Agencies = low interest rates = higher home prices = building mcMansions.
Thought right now it does seem that there has been an oversupply of McMansions ...
I have dealt with the notion that the RMB is overvalued in a financial sense previously. I don't buy it. Look at the BOP math -- offsetting the current account surplus/ FDI inflows requires a capital outflow (hot money) of 10% of China's GDP year after year. china's banks are bad, but not that bad. Plus, China could pull funds in my not keeping RMB rates below US rates. Moreover, the Chinese banks are matched, currency wise, so they don't have direct exposure to an appreciation/ depreciation. They do have indirect exposure, through their lending to the export sector. But keeping the rMB low just builds on that problem ... as it artificially inflates the size of china's export sector, doesn't it?
Incidentally, there a host of credible Chinese economist -- Fan Gang, Yu Yongding, He Fan, David Li, another guy at Beijing whose name eludes me -- who believe the RMB is undervalued.
A currency based on liters in a barrel of oil is possible, but unless you assume that the real price of oil is gonna suddenly stabilize, it implies large changes in other prices ... nuclear energy is good for making electricity, but electricity is hard to store or trade (internaitonally). And why would the US -- the current hegemon -- want to allow the world's monetary policy to be made by the country with the most supply of the commodity selected as the basis for the world's money ...
DOR -- standing committee of the Politburo, eh -- wow, China really is a communist country ... institutionally at least.
Stephen Jen (oops, I meant David Chiang) ...
I would ask "how many more McMansion houses" does the PBoC think the US economy will require. Look at Chinese purchases of Agencies and MBS. If you believe that US monetary policy has been rather expansionary (money growth has actually been restrained recently in the uS, me thinks), the PBoC has played a big role turning that epansionary monetary policy into demand for McMansions ... expansionary monetary policy = demand for imports = Chinese surpluses = Chinaes reserve growth = Chinese demand for MBS/ Agencies = low interest rates = higher home prices = building mcMansions.
Thought right now it does seem that there has been an oversupply of McMansions ...
I have dealt with the notion that the RMB is overvalued in a financial sense previously. I don't buy it. Look at the BOP math -- offsetting the current account surplus/ FDI inflows requires a capital outflow (hot money) of 10% of China's GDP year after year. china's banks are bad, but not that bad. Plus, China could pull funds in my not keeping RMB rates below US rates. Moreover, the Chinese banks are matched, currency wise, so they don't have direct exposure to an appreciation/ depreciation. They do have indirect exposure, through their lending to the export sector. But keeping the rMB low just builds on that problem ... as it artificially inflates the size of china's export sector, doesn't it?
Incidentally, there a host of credible Chinese economist -- Fan Gang, Yu Yongding, He Fan, David Li, another guy at Beijing whose name eludes me -- who believe the RMB is undervalued.
Written by bsetser on 2006-09-20 08:07:03
One of the most profound observations about the Gold Standard was penned by the late Robert Triffin while reflecting upon BW sometime in the late 50's. To paraphrase him, he said something akin to: "Man has fewer follies greater than his efforts scour all ends of the earth in search of this yellow metal, expending both enormous effort and expense to dig great holes in order to extract it, and smelt it, then investing further sums to transport it to opposite corners of the globe only then to expend further effort and expense digging additional great holes in order to bury it back under the ground.
http://nihoncassandra.blogspot.com/
http://nihoncassandra.blogspot.com/
Written by Cassandra on 2006-09-20 08:31:02
"..."A consensus among policymakers has emerged," said He Fan, an economist at the Chinese Academy of Social Sciences in Beijing, which is affiliated with the State Council, the equivalent of the cabinet. "More and more people now agree that China needs a more flexible exchange rate."..."
http://www.rgemonitor.com/content/view/147387/86/
http://www.rgemonitor.com/content/view/147387/86/
Written by Guest on 2006-09-20 08:47:02
Guest: I've blogs pretty extensively on the Chinese rural land system, and most reports get it wrong. Chinese rural land is managed as part of a village pool.
The land in interior China is pretty worthless. Where the big fights are in the richer provinces where land is being converted from agriculture to industry. If you move to a system of individual tenure would actually *decrease* compensation because as it is right now, when land is taking out of the system, everyone in the village starts screaming, whereas a system of individual property would allow people to picked off one by one. Also, right now, its pretty much impossible for a peasant to everything, since once land is taken out of the pool, the remaining land gets redistributed. If it were, then you have to create a social welfare network to deal with all of the people that completely lose their land.
Labor intensive agriculture isn't very efficient, and right now Chinese agriculture is basically a make work welfare jobs program (not that there is anything wrong with that).
http://twofish.wordpress.com/
The land in interior China is pretty worthless. Where the big fights are in the richer provinces where land is being converted from agriculture to industry. If you move to a system of individual tenure would actually *decrease* compensation because as it is right now, when land is taking out of the system, everyone in the village starts screaming, whereas a system of individual property would allow people to picked off one by one. Also, right now, its pretty much impossible for a peasant to everything, since once land is taken out of the pool, the remaining land gets redistributed. If it were, then you have to create a social welfare network to deal with all of the people that completely lose their land.
Labor intensive agriculture isn't very efficient, and right now Chinese agriculture is basically a make work welfare jobs program (not that there is anything wrong with that).
http://twofish.wordpress.com/
Written by Joseph Wang on 2006-09-20 09:54:35
Apologies - the link for the He Fan quote should have been:
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/19/AR2006091900446.html
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/19/AR2006091900446.html
Written by Guest on 2006-09-20 11:51:38
Cassandra,
Triffin's remarks are all, of course, entirely correct.
But they strike me as dated. There is a certain Olympian tone, a sureness, a confidence of power, that you don't hear so much these days.
The astounding hubris of the 20th century's central planners will be remembered for all of human history. A few men sitting in an office could change the lives of millions, billions, of men and women, with a few strokes on the keyboard. Should the price of money go up or down today? Woops, I pressed 5, I meant 4. But maybe if it was 5... perhaps the people should be more frugal this year? Would it hurt them so much to save a little?
If men (and I mean men) were to easily and voluntarily abandon this form of power - even the tiny, almost absurd, politically and bureaucratically bound, fragment of it that the managers of the dollar and other currencies have left - it would violate everything we know about human nature. We would be forced to believe that the new socialist man had, in fact, been created.
Perhaps you find this implicit comparison of the Brads and Nouriels of the world - who are, as anyone who reads their writing for five minutes can tell, reasonable, extremely intelligent, and thoroughly well-meaning men - to Communist apparatchiks, ridiculous and offensive. But many - even most - of the apparatchiks shared exactly these qualities. Do you really believe that working at the Fed and working at Gosplan were so different?
Of course, the Fed never had to set the price of sausage. But if a few old men hadn't said no to Rex Tugwell, they might well have.
Ancient history, I know. But still, since institutions always reinvent themselves to fit the present (compare what the IMF and World Bank were designed to be, to what they are now), I think that those who work around or in one of this antiquity and magnitude should have a clear understanding of the thoughts and intentions of those who created ours.
Yes, Rothbard again. Sorry. To stay on topic, though, it's worth noting that another interesting part of Fan Gang's paper is the reference section, where we find out what the well-dressed Communist apparatchik of today is reading. There's one name between Prestowitz and Xiaobo, and it ain't Samuelson.
So yes: the effort spent to extract gold from the earth is, in a welfare economics sense, wasted. But when you realize that the alternative is precisely that - welfare economics - I think it starts to make a little more sense. Surely in our lifetimes people acting at the behest of central planners have done far more desperate and useless things than digging a little metal out of the ground. How shabby all those dreams of a perfect society must seem to us now!
Of course I don't actually expect Brad to write up a plan for the abolition of his own profession, and in fact I owe him a small apology for taunting him on a topic he's obviously and quite understandably reluctant to write on. But since this Austrian stuff seems to be turning up more, I think it's worth the time of any young economist to get a firm grip on it - if only to save up a few snappy retorts.
Triffin's remarks are all, of course, entirely correct.
But they strike me as dated. There is a certain Olympian tone, a sureness, a confidence of power, that you don't hear so much these days.
The astounding hubris of the 20th century's central planners will be remembered for all of human history. A few men sitting in an office could change the lives of millions, billions, of men and women, with a few strokes on the keyboard. Should the price of money go up or down today? Woops, I pressed 5, I meant 4. But maybe if it was 5... perhaps the people should be more frugal this year? Would it hurt them so much to save a little?
If men (and I mean men) were to easily and voluntarily abandon this form of power - even the tiny, almost absurd, politically and bureaucratically bound, fragment of it that the managers of the dollar and other currencies have left - it would violate everything we know about human nature. We would be forced to believe that the new socialist man had, in fact, been created.
Perhaps you find this implicit comparison of the Brads and Nouriels of the world - who are, as anyone who reads their writing for five minutes can tell, reasonable, extremely intelligent, and thoroughly well-meaning men - to Communist apparatchiks, ridiculous and offensive. But many - even most - of the apparatchiks shared exactly these qualities. Do you really believe that working at the Fed and working at Gosplan were so different?
Of course, the Fed never had to set the price of sausage. But if a few old men hadn't said no to Rex Tugwell, they might well have.
Ancient history, I know. But still, since institutions always reinvent themselves to fit the present (compare what the IMF and World Bank were designed to be, to what they are now), I think that those who work around or in one of this antiquity and magnitude should have a clear understanding of the thoughts and intentions of those who created ours.
Yes, Rothbard again. Sorry. To stay on topic, though, it's worth noting that another interesting part of Fan Gang's paper is the reference section, where we find out what the well-dressed Communist apparatchik of today is reading. There's one name between Prestowitz and Xiaobo, and it ain't Samuelson.
So yes: the effort spent to extract gold from the earth is, in a welfare economics sense, wasted. But when you realize that the alternative is precisely that - welfare economics - I think it starts to make a little more sense. Surely in our lifetimes people acting at the behest of central planners have done far more desperate and useless things than digging a little metal out of the ground. How shabby all those dreams of a perfect society must seem to us now!
Of course I don't actually expect Brad to write up a plan for the abolition of his own profession, and in fact I owe him a small apology for taunting him on a topic he's obviously and quite understandably reluctant to write on. But since this Austrian stuff seems to be turning up more, I think it's worth the time of any young economist to get a firm grip on it - if only to save up a few snappy retorts.
Written by Anonymous on 2006-09-20 12:28:22
Austrian economics has been surprisingly important in China with Hayek and von Mises being extraordinarily influential in determining economic policy.
Written by Joseph Wang on 2006-09-20 15:16:11
Brad,
Please, please tell me you didn’t really doubt that the party controls the state in China!
Very basic stuff, along the lines of “the party controls the army” and “don’t #&*! with the party.”
.
Please, please tell me you didn’t really doubt that the party controls the state in China!
Very basic stuff, along the lines of “the party controls the army” and “don’t #&*! with the party.”
.
Written by DOR on 2006-09-20 17:52:57
"Austrian economics has been surprisingly important in China with Hayek and von Mises being extraordinarily influential in determining economic policy. "
Wow. You must be kidding.
Wow. You must be kidding.
Written by Anonymous on 2006-09-20 19:02:51
Doesn't seem strange at all to me, actually.
The Austrians were rejected in the West because they sided, rather unavoidably to be sure, with the losing faction in the corporatist revival of the '30s. See Laidler. Nothing that still reeks of anyone who opposed the New Deal in the US, the Fabians in Britain, or the Social Democrats in Europe, has a terribly good odor to the average literate person in the West. Even their names are forgotten (quick, name three anti-Roosevelt intellectuals).
Obviously nothing at all like this happened in China.
So if you're going to check out market economics, why not go straight for the hard stuff? If you were to consider becoming a metalhead, would you start with Poison and Def Leppard? No. You'd buy Metallica, Slayer and Mastodon.
The Austrians were rejected in the West because they sided, rather unavoidably to be sure, with the losing faction in the corporatist revival of the '30s. See Laidler. Nothing that still reeks of anyone who opposed the New Deal in the US, the Fabians in Britain, or the Social Democrats in Europe, has a terribly good odor to the average literate person in the West. Even their names are forgotten (quick, name three anti-Roosevelt intellectuals).
Obviously nothing at all like this happened in China.
So if you're going to check out market economics, why not go straight for the hard stuff? If you were to consider becoming a metalhead, would you start with Poison and Def Leppard? No. You'd buy Metallica, Slayer and Mastodon.
Written by Anonymous on 2006-09-20 21:25:54
Re: Austrian economics. Quite serious. You read PRC economists, and they constantly are talking about Hayek and von Mises, because both of them identified the basic problem with the Maoist era, which is the economic calculation problem. In the lack of pricing signals, it's impossible to run an economy, and the point of reform has been to introduce pricing signals.
Now the unique thing about the PRC is that they have combined market economics with large amounts of state ownership of industry. The way that this works is that there are very strong rules in place so that the state acts like a passive shareholder, and doesn't distort the market by subsidizing the industrial activities of SOE's.
So what you end up with is a "socialist market economy" i.e. state owned entities managed using pricing signals. This fixes the essential problem with central planning that von Mises and Hayek identified.
Now it is true that China has taken the ideas of the Austrian school and modified them to something that is very different from the way that it has progressed in the West, but the same thing happened to Marx.
Now the unique thing about the PRC is that they have combined market economics with large amounts of state ownership of industry. The way that this works is that there are very strong rules in place so that the state acts like a passive shareholder, and doesn't distort the market by subsidizing the industrial activities of SOE's.
So what you end up with is a "socialist market economy" i.e. state owned entities managed using pricing signals. This fixes the essential problem with central planning that von Mises and Hayek identified.
Now it is true that China has taken the ideas of the Austrian school and modified them to something that is very different from the way that it has progressed in the West, but the same thing happened to Marx.
Written by Joseph Wang on 2006-09-20 21:52:46
Anonymous, trust me: I am not confused on either money or prices.
At least, not confused enough to look for answers from Mises.
I don't know what you're trying to prove with the graph of gold production, except perhaps to show that its quantity rises ::ahem:: slowly, yet unpredictably. The gold per capita shown has perhaps doubled in 170 years, according to this graph. Yet human wealth as measured by any reasonable standard, has risen immeasurably more.
The wiggles on graphs might not mean much to someone observing from Mars. But that tiny inflection around 1898 is what saved the United States from a deflation-inspired social revolution, the story of which is nicely told in The House of Morgan.
The part about how J. P. Morgan held the U. S. Government hostage with a boatload of gold anchored just offshore is very entertaining.
Charles of MercuryRising
http://www.phoenixwoman.blogspot.com
At least, not confused enough to look for answers from Mises.
I don't know what you're trying to prove with the graph of gold production, except perhaps to show that its quantity rises ::ahem:: slowly, yet unpredictably. The gold per capita shown has perhaps doubled in 170 years, according to this graph. Yet human wealth as measured by any reasonable standard, has risen immeasurably more.
The wiggles on graphs might not mean much to someone observing from Mars. But that tiny inflection around 1898 is what saved the United States from a deflation-inspired social revolution, the story of which is nicely told in The House of Morgan.
The part about how J. P. Morgan held the U. S. Government hostage with a boatload of gold anchored just offshore is very entertaining.
Charles of MercuryRising
http://www.phoenixwoman.blogspot.com
Written by Charles on 2006-09-21 20:48:37
Charles,
You are not entitled to disagree with anything unless you understand it - at least to the point at which your disagreement becomes salient.
If you think there are logical fallacies or fundamental philosophical misconceptions in Mises, Rothbard, etc, find them. If you do, the sensible place to post them is not here, but on the working papers list at mises.org.
My point was that the total amount of gold in the world next year is always an extremely predictable function of the total amount of gold in the world this year. Where "extremely" means that any effect on prices that is unpredictable due to the effect of variation in gold mining is negligible. At least from the perspective of an economic actor trying to make a decision about production or lending.
The assumption, which you seem to consider unquestionable, that the quantity of money, which is a precise numerical figure, has to rise with the "quantity of wealth," which is a subjective assessment and cannot be measured by any precise calculation, has a name. It is called inflationism.
Of course, if you don't like that name - for example, if you find it pejorative - you can call it anything you like. It is just an assumption. It can be true or false, but it can't be both.
If I may make a small guess, you seem very concerned with peoples' motivations for selecting their assumptions, and the history of how those assumptions were created. This allows you to rule out large domains of thinking which conflict with your own structures of assumption.
An absolutely necessary task, when we consider the amount of useless verbiage the human race has generated. Still, I suspect that if you look carefully at the history and motivation of your own assumptions, and this one in particular, you may decide to adjust your perspective.
You are not entitled to disagree with anything unless you understand it - at least to the point at which your disagreement becomes salient.
If you think there are logical fallacies or fundamental philosophical misconceptions in Mises, Rothbard, etc, find them. If you do, the sensible place to post them is not here, but on the working papers list at mises.org.
My point was that the total amount of gold in the world next year is always an extremely predictable function of the total amount of gold in the world this year. Where "extremely" means that any effect on prices that is unpredictable due to the effect of variation in gold mining is negligible. At least from the perspective of an economic actor trying to make a decision about production or lending.
The assumption, which you seem to consider unquestionable, that the quantity of money, which is a precise numerical figure, has to rise with the "quantity of wealth," which is a subjective assessment and cannot be measured by any precise calculation, has a name. It is called inflationism.
Of course, if you don't like that name - for example, if you find it pejorative - you can call it anything you like. It is just an assumption. It can be true or false, but it can't be both.
If I may make a small guess, you seem very concerned with peoples' motivations for selecting their assumptions, and the history of how those assumptions were created. This allows you to rule out large domains of thinking which conflict with your own structures of assumption.
An absolutely necessary task, when we consider the amount of useless verbiage the human race has generated. Still, I suspect that if you look carefully at the history and motivation of your own assumptions, and this one in particular, you may decide to adjust your perspective.
Written by Anonymous on 2006-09-23 11:33:18
Anonymous
I am sympathetic to the Austrians for all the wrong reasons. First - and it really helps if one is honest with oneself in the life - Austrianism (v. inflationism) suits my disposition, my innate nature is one which tends towards honesty, deplore cheaters, charlatans & sophistry and savours the satisfaction that results from the honest work of a job well-done. Nurture & upbringing has reinforced my view that "nothing is for free"- especially Lunch. When my immigrant grandfather passed away at 91 or so, we found a drawer stuffed full of all his social security checks, uncashed still wrapped in their Fed paper. He worked until he was 85 or so and wouldn't be caught dead taking handouts even though he was left of FDR, relying on his savings. He simply viewed social security as an "insurance program" that he didn't "need" (nor deserve) rather than a right. He never begrudged others for taking it, even those who didn't need it.
But the primary reason for my sympathies is simply that it's harder to cheat an Austrian-inspired regime - be it gold or simple BuBa-style monetary conservativeness. Or the business cycle. Austrians it seems to me would inherently eschew plastic surgery! I am not a cynic - though I must admit to having a skeptical streak. That said, I do have a rather dim view of man (and I mean Man - NOT woman) at least in regards to things where money & resources are concerned, particularly in western modernity where HE is unburdened of guilt or shame and/or other things that might have kept the village head-man somewhat culpable. And be certain there are no romanticized notions here, just relative ones.
Inflationism is to my mind just too slippery slope for MAN-the-greedy, for man-who-desires-the-good-life at almost any cost, to be left in whimsical control of a monstrously complex and fallible system such fiat money whose success by definition is dependant upon NOT falling prey to precisely the temptations that I see MAN most easily seduced by: Power, Quantity of Things, and Sex (not necesasrily in that order). And the currency (not literally as this would be a circular reference) by which HE obtains these is through the subversion of the political process, eventually producing the actual currrency required for these things setting in motion a an unending feedback loop that will have calamitous ends for everyone, at least in comparison to the ends where the monetary levers are throttled by fortitude and something more than the ridiculously conflicting goals of price stability AND full employment. Not that I think they are detertministically conflicting (Vickerey for example didn't), I just believe they can't do it alone - certainly not in an environment where a single politician is incapable of uttering "higher" and "taxes" within a two sentence proximity of each other, without being tossed to the lions straight-away.
I would propose at the outset that those cultures where the cult of the individual is strongest are those at greatest risk of such subversion. And this seems borne out by the Anglo-Saxon experience do date (though the Banque de France is running a close fourth for entirely different reasons). But whereas one might expect Japan and China to be inherently more sympathetic, they are seemingly using their breed of collectivism to play as a team, and for their team's benefit with Japan in particular understanding their overall wealth is perhaps for the moment maximized by trashing the Yen, despite the BoJ bofffins' naturally more Austrian inclinations historically burnished as they are upon their concisouness.
I cannot speak to the technical superiority or theoretical virtues of the Austrians which may or may not be true, only to my inherent distrust and distaste for inflationism, particularly in the hands on MEN. Perhaps if women had control of both the monetary levers and the political levers, they might find more benign uses of the beneficial aspects of inflationism (which do exist it must be said) by using it to corral the energies of the men-folk into more useful investment-oriented pursuits.
I am sympathetic to the Austrians for all the wrong reasons. First - and it really helps if one is honest with oneself in the life - Austrianism (v. inflationism) suits my disposition, my innate nature is one which tends towards honesty, deplore cheaters, charlatans & sophistry and savours the satisfaction that results from the honest work of a job well-done. Nurture & upbringing has reinforced my view that "nothing is for free"- especially Lunch. When my immigrant grandfather passed away at 91 or so, we found a drawer stuffed full of all his social security checks, uncashed still wrapped in their Fed paper. He worked until he was 85 or so and wouldn't be caught dead taking handouts even though he was left of FDR, relying on his savings. He simply viewed social security as an "insurance program" that he didn't "need" (nor deserve) rather than a right. He never begrudged others for taking it, even those who didn't need it.
But the primary reason for my sympathies is simply that it's harder to cheat an Austrian-inspired regime - be it gold or simple BuBa-style monetary conservativeness. Or the business cycle. Austrians it seems to me would inherently eschew plastic surgery! I am not a cynic - though I must admit to having a skeptical streak. That said, I do have a rather dim view of man (and I mean Man - NOT woman) at least in regards to things where money & resources are concerned, particularly in western modernity where HE is unburdened of guilt or shame and/or other things that might have kept the village head-man somewhat culpable. And be certain there are no romanticized notions here, just relative ones.
Inflationism is to my mind just too slippery slope for MAN-the-greedy, for man-who-desires-the-good-life at almost any cost, to be left in whimsical control of a monstrously complex and fallible system such fiat money whose success by definition is dependant upon NOT falling prey to precisely the temptations that I see MAN most easily seduced by: Power, Quantity of Things, and Sex (not necesasrily in that order). And the currency (not literally as this would be a circular reference) by which HE obtains these is through the subversion of the political process, eventually producing the actual currrency required for these things setting in motion a an unending feedback loop that will have calamitous ends for everyone, at least in comparison to the ends where the monetary levers are throttled by fortitude and something more than the ridiculously conflicting goals of price stability AND full employment. Not that I think they are detertministically conflicting (Vickerey for example didn't), I just believe they can't do it alone - certainly not in an environment where a single politician is incapable of uttering "higher" and "taxes" within a two sentence proximity of each other, without being tossed to the lions straight-away.
I would propose at the outset that those cultures where the cult of the individual is strongest are those at greatest risk of such subversion. And this seems borne out by the Anglo-Saxon experience do date (though the Banque de France is running a close fourth for entirely different reasons). But whereas one might expect Japan and China to be inherently more sympathetic, they are seemingly using their breed of collectivism to play as a team, and for their team's benefit with Japan in particular understanding their overall wealth is perhaps for the moment maximized by trashing the Yen, despite the BoJ bofffins' naturally more Austrian inclinations historically burnished as they are upon their concisouness.
I cannot speak to the technical superiority or theoretical virtues of the Austrians which may or may not be true, only to my inherent distrust and distaste for inflationism, particularly in the hands on MEN. Perhaps if women had control of both the monetary levers and the political levers, they might find more benign uses of the beneficial aspects of inflationism (which do exist it must be said) by using it to corral the energies of the men-folk into more useful investment-oriented pursuits.
Written by Cassandra on 2006-09-23 19:35:54
Cassandra,
Yes, it's that ring thing again. (I am 100% sure that Tolkien's work will be read five centuries from now, when Dom DeLillo, Dave Eggers and Jonathan Franzen are arcana for only the most dedicated of scholars.)
Our intellectual culture descends, albeit through a long chain of strange events, from Calvinism. The Calvinists begat the Puritans (think Jonathan Edwards), who begat the Unitarians and Transcendentalists (think Emerson), who begat the Progressives (think John Dewey). The specific details of religious doxology changed all the time, but one thing that didn't change is the commitment to creating the kingdom of heaven on earth.
We cannot deny - and I wish libertarians would spend a less time trying to deny - that if God Himself came down to earth and ruled with infinite benevolence and his usual omnipotent, omniscient fortitude, the kingdom would be a very cool place to live. Inflation would be the least of the levers in the divine hand. The problem is that when you try to create a human equivalent of this heavenly state, one run by Man rather than God, the results seem to be rather different.
The style of economics that most people learn in school is policy economics, which is all about giving the God-imitators all the tools they need to manage said kingdom. Even the word "statistics" originally meant "state data." Policy economics is most effective when expressed in the language of mathematics because it is more arcane and recondite, and harder to argue with. Mathematical economics conceals the fact that all the interesting and debatable questions are not in the equations, but in the assumptions that map from the real world to the equations.
Austrian economics is descriptive economics. Its goal is not planning, but understanding. It expresses its logic in natural language because that is the language in which humans think and act. Since the input and output to the problem are both verbal, it does not improve precision in any way if you insert a cloud of math in the loop.
My problem with the Austrians is all in the presentation. Mises himself was very careful about separating ethics from reason. He scrupulously adheres to Weber's Wertfreiheit. Rothbard is a brilliant economist (and historian - his four-volume history of North America up to the Revolution opens up a world that few of us have ever seen), but his insistence that libertarian government is the only reasonable and ethical way to live strikes me as whiny. The kibbutz model, for example, may not scale to the size of a country, but I don't think reason alone can prove it false. (And don't even start me on Lew Rockwell.)
Nonetheless, there is one great advantage to Austrian economics: it's small. It is not really a large enough body of knowledge to be a full-fledged specialty. Anyone reasonably smart can learn the whole thing in a month or two. As a computer scientist, not an economist, I was amazed to discover this, but it's perfectly true. Hopefully no one will come up with an equivalent for computer science, or yours truly will have to locate a new line of work...
Yes, it's that ring thing again. (I am 100% sure that Tolkien's work will be read five centuries from now, when Dom DeLillo, Dave Eggers and Jonathan Franzen are arcana for only the most dedicated of scholars.)
Our intellectual culture descends, albeit through a long chain of strange events, from Calvinism. The Calvinists begat the Puritans (think Jonathan Edwards), who begat the Unitarians and Transcendentalists (think Emerson), who begat the Progressives (think John Dewey). The specific details of religious doxology changed all the time, but one thing that didn't change is the commitment to creating the kingdom of heaven on earth.
We cannot deny - and I wish libertarians would spend a less time trying to deny - that if God Himself came down to earth and ruled with infinite benevolence and his usual omnipotent, omniscient fortitude, the kingdom would be a very cool place to live. Inflation would be the least of the levers in the divine hand. The problem is that when you try to create a human equivalent of this heavenly state, one run by Man rather than God, the results seem to be rather different.
The style of economics that most people learn in school is policy economics, which is all about giving the God-imitators all the tools they need to manage said kingdom. Even the word "statistics" originally meant "state data." Policy economics is most effective when expressed in the language of mathematics because it is more arcane and recondite, and harder to argue with. Mathematical economics conceals the fact that all the interesting and debatable questions are not in the equations, but in the assumptions that map from the real world to the equations.
Austrian economics is descriptive economics. Its goal is not planning, but understanding. It expresses its logic in natural language because that is the language in which humans think and act. Since the input and output to the problem are both verbal, it does not improve precision in any way if you insert a cloud of math in the loop.
My problem with the Austrians is all in the presentation. Mises himself was very careful about separating ethics from reason. He scrupulously adheres to Weber's Wertfreiheit. Rothbard is a brilliant economist (and historian - his four-volume history of North America up to the Revolution opens up a world that few of us have ever seen), but his insistence that libertarian government is the only reasonable and ethical way to live strikes me as whiny. The kibbutz model, for example, may not scale to the size of a country, but I don't think reason alone can prove it false. (And don't even start me on Lew Rockwell.)
Nonetheless, there is one great advantage to Austrian economics: it's small. It is not really a large enough body of knowledge to be a full-fledged specialty. Anyone reasonably smart can learn the whole thing in a month or two. As a computer scientist, not an economist, I was amazed to discover this, but it's perfectly true. Hopefully no one will come up with an equivalent for computer science, or yours truly will have to locate a new line of work...
Written by Anonymous on 2006-09-24 14:02:11
I agree with your assessment that Tolkien will outlive Delillo et. al (and maybe even outlive humanity). But is "The Ring" really the best analogy for the phenomena responsible for the inferiority of inflationism?
Most viable preferable alternatives to "Schizophrenic Whimsical Flex-O-Discretionary Inflationism" merely provide a structure to prevent Man from doing what Man will do, just as surely as there is a Second Law of Thermodynamics. Man - anglo-saxon man particularly -is, by nature, a lazy wall-sitter. He will eschew work for hedonism, find a baker's-dozen of ways to sweep the proverbial dust under the carpet rather than dispose of it properly, and is fantastically expert at conjuring up demagogic excuses to perjure (both to oneself & others) the real reasons for undertaking obviously inept "penny-wise but pound-foolish" shortcuts in lieu of more sensible policy once properly discounted to reflect externalities and the time value of money.
Following through the ring analogy, does this make Japanese, Chinese and Germans "Elves" insofar as they are more impervious to seductions of the Ring than the Anglo-Saxons? I recall that the Japanese ambassador in France took great offense when Edith Cresson unfortunately labelled them as "Ants"...
Most viable preferable alternatives to "Schizophrenic Whimsical Flex-O-Discretionary Inflationism" merely provide a structure to prevent Man from doing what Man will do, just as surely as there is a Second Law of Thermodynamics. Man - anglo-saxon man particularly -is, by nature, a lazy wall-sitter. He will eschew work for hedonism, find a baker's-dozen of ways to sweep the proverbial dust under the carpet rather than dispose of it properly, and is fantastically expert at conjuring up demagogic excuses to perjure (both to oneself & others) the real reasons for undertaking obviously inept "penny-wise but pound-foolish" shortcuts in lieu of more sensible policy once properly discounted to reflect externalities and the time value of money.
Following through the ring analogy, does this make Japanese, Chinese and Germans "Elves" insofar as they are more impervious to seductions of the Ring than the Anglo-Saxons? I recall that the Japanese ambassador in France took great offense when Edith Cresson unfortunately labelled them as "Ants"...
Written by Cassandra on 2006-09-25 11:28:13
Inflation is like the ring because of i
Maybe a question to ask would be, "Why do the markets see the dollar as being stronger than economics suggests it should be?" The stock explanation is that the US has a (debt-fueled) consumer market essential to exporters. But this is no longer really true. Countries like Japan have internal markets, and countries like China and Brazil are developing those internal markets. If the rest of the world wanted to, it could take up the role of the grasshopper being played so successfully by the US today, printing money to stimulate internal demand while forcing the US to go through a painful contraction.
Charles of MercuryRising
http://www.phoenixwoman.blogspot.com