patrick.net

Randy,

Government manipulation of liquidity is what we want to avoid. Gold has been used as money for centuries because it's value is deemed relatively stable. Governments cannot make gold out of thin air. In that sense there is no equivalent of a printing press for gold - zero sources of that type of inflationary manipulation and no need to measure it.

Monetary inflation is vastly different than price inflation, even though the former manifests itself as the later. Debasement of money by the government can in no way be confused with the effect of the free market on prices due to supply and demand of goods. Monetary inflation results from an increase in the supply of the currency itself.

I'm curious as to exactly where/how inflation enters the picture in your MMOGs and VWs.

frank, randy,

what's the point backing currency production with a single mineral commodity of no particular use? it's just like backing a currency with another currency...

you're virtually saying that no country has the right to print a currency as a form of value exchange for labour unless it is sitting on a mountain of gold. the act of buying in gold to that country if it is gold-poor to keep someone else happy is only going to hurt the productivity of that country, which may have, for instance, lots of silicon and expertise to turn it into valuable computer chips, on the other hand...

when the US dropped the gold standard entirely in the 70s, the argument was that it preferred to value its economy in terms of its people, and its products and productivity, i.e. high technology, creativity, ingenuity, labour, etc. Everyone else followed suit fairly soon afterward. I have heard critiques of this, saying the US was facing a credit crisis, so it elected to abandon gold because it served the purpose of bailing the country out of the crisis. Using the USD as the petrocurrency has in turn allowed even greater transgressions. I don't know which version of the story is more likely to be correct. are you saying that this allows unlimited printing of money in all countries who abandon the gold standard? further, if you abandon gold, is there another way of valuing a currency with a yardstick to prevent too much of it being printed? are there natural checks and balances in the system of international monetary exchange?

and, most importantly, what's an MMOG and a VW?

DS,

You have got to read this

http://fafblog.blogspot.com/2006/04/slipperiest-slope-as-you-all-know.html

Here's a choice quote:

"Oh sure, today you may think it's harmless for gays and lesbians to get married, but take away the precious protection of state-sponsored homophobia and tomorrow you'll have men marrying machines...not only will this destroy the sanctity of marriage, it will destroy Western civilization itself, as our superintelligent sex computers rise up against their human masters to make bottoms of us all!"

frank,

The gold standard was abandoned for a reason. It makes it impossible for the government to ease a bad social situation (great depression public works) without creating deflation. And deflation sucks, people hoard money and refuse to invest.

Given how volatile our oil producers are, do you want to give them that much power? Ditto for other energy sources, controlled by a small number of (rather corrupt) corporations and nations.

I'll go with an easy to supervise printing press that is at least nominally controlled by the American people.

Nor is a gold standard uninflatable. The ancient European soverigns used to start debasing their coinage everytime they needed cash for something. Like it or not, control of any money supply lies in national governments and should lie there. A commodities based currency system isn't going to change that. Any private sector bartering system will run into structural and transactional problems very quickly, and be very expensive and inefficient for its users.

frank,

Seniorage is quite possible with gold-backed currency. As astrid points out, the very term and concept of seniorage was perfected many centuries ago, back when the very coins themselves were intrinsically valuable. Liquidity is controlled in such a system simply by manipulating the reserves. Introducing velocity to the equation, which is a very important factor in modern capital markets, only compounds the problem.

Further, you have none -- and I mean 0 -- monetary control in a pure commodity currency system. In such a system all currencies must be fixed by triangular arbitrage. That is the USD is tied to gold at xGLD/1USD and the EUR is tied at xGLD/1EUR, then they are by nature fixed against each other. This means that no coutry has any monetary power because they have forfeited such control to servicing the peg. This is basic IS-LM model stuff. Floating gold standard currencies, more like we had at the end of the BW agreement, are really just fiat systems where exchange rates are periodically reset instead of free floating.

You are describing microeconomic price function, not inflation. Inflation is measured at parity, meaning that the price function is adjusted for purchasing power. If a candy bar costs me $1.50 and cost my dad $1.00 20 years ago, but ceteris paribus we both have the same purchasing power (I make 50% more than my dad), then there has been 0 inflation. If my candy bar costs $1.75, and should have cost $1.50 because of the above, but maybe there is a candy-bar shortage, there is still 0 inflation, just a pricing function at work.

You can substitute or elasticize in response to price function increases. You can do nothing about inflation.

1 haha will buy 4 houses after a 15 year housing bust

DS,

MMOG = massively multiplayer online game
VW = virtual world. These are "games" but often without a specific goal, more open-ended virtual realities.

Examples of MMOGs are the hyper popular World of Warcraft, or previously EverQuest. Lineage is a huge MMOG in Asia. Examples of VWs are The Sims Onine or Second Life.

frank,

These "games" have enormous economies, both internal economies and "secondary" economies. A game such as WoW has an economy within the game as created by the game designers. It is based on "gold", or as we call it "virtual currency". There is a phenomenon called RMT (real money trade), which started as people in these games started selling stuff like gold, houses, magic flaming swords, etc. to each other on Ebay for real money. This is the RMT market or Secondary Market.

The RMT market is almost $1bn worldwide today, and expected to grow to $7bn by 2009. It is enormous, and creates a huge profit opportunity. Because of this "farmers" popped up. Entrepreneurs who would play these games purely to accumulate gold and items to sell for profit. Then came sophisticated farming operations -- mainly in China where cost of labor is low and internet infrastructure is good, and a gaming culture exists. These operations will produce more currency as fast as they can, usually selling through middle-men operators (the supply chain is a bit complicated, but think of it as a frontier, wild west economy with few governing laws and no taxation).

The problem is that in these games there exists almost no monetary or fiscal controls, so the game designers see their games' economies forfeiting all power to the productivity of the inflation-driving "farmers". Worse, since the middle-men operators have exclusive information regarding future price direction, they operationally arbitrage the system to the cost of the game-world community, hurting both people who buy and sell stuff as well as those who don't (people who just play the games as designed).

Worse yet, there is really no production constraint other than time and operational efficiency, both of which are overcome by scale and sophistication. So, you see an experimental example of a worst-case situation where a commodity-based monetary system (often intended to be a barter system) yields to basic capitalist forces to the demise of the entire community. The reaction by game publisher has been largely legal in nature, but has also been completely ineffective. The real answer is to engineer a real, functional economy where the internal "primary" economy has monetary, fiscal and production constraint (microeconomic) levers.

SQT,

I would like the threadmaster privileges. On the other hand, if anyone has concerns about letting a relative stranger in on the privileges, I totally understand.

My primary concern was with my embarrassing mis-typings and wanted a way to correct them. If wordpress doesn't differentiate between my posts and other people's, I think it might be better (from the collective's prospective) for you to bear with my poor proofreading skillz for a bit long. :)

astrid,

download the google toolbar. it will correct spelling errors in forms like this textbox you type in.

Ha Ha,

That is one huge house. Is that in Chicago?

State and local governments will crumble. Lowered and missed property taxes will do the trick:

JONATHAN LANSNER
Register columnist
jlansner@ocregister.com

"It was the most worrisome number I've recently seen about Orange County's housing market.

"In January, I told you that a decade has passed since this many of us missed paying a December installment of property taxes.

'So with tax installment No. 2 due Monday - have you paid yet? - I checked with the county's tax collector, John Moorlach, to see if we've made progress.

"I've long wondered when the Fed's two-year campaign to cool the economy would click. Raising short-term interest rates was going to eventually smack homebuyers with adjustable-rate mortgages in the wallet. That's a large group in this town.

"The county tax collector's data from January boosted my hunch. Last week, Moorlach's staff was kind enough to whip up an interim report for me.

"The fresh data show that the early trend wasn't any statistical fluke, as we continue to be annoyingly late on our property taxes:

•Through the start of April, 24,701 first-installment bills were still late – 16 percent more than the same time a year ago. The tax collector only sent out 2 percent more bills this year.

•Those late bills were for $38million in total taxes, up 37 percent from a year ago. That handily exceeds the 11 percent expansion in overall property taxes due to soaring home prices.

"Since the last tally in January, Orange Countians managed to pay $50 million worth of their tardy first-installment bills. (That doesn't include the 10 percent late fee - or the 18 percent annual interest penalties that start accruing July 1!)

"Still, the county's short 2 percent of the $1.9 billion due - from 3 percent of all taxpayers. The typical tardy payer owes a decidedly below-average bill of $1,560.

"I wasn't surprised. So many people are stretching (to buy a home). It seems intuitive that some people are having a tougher time," Moorlach says. He calls payment results for this upcoming bill "the real test."

"Other markers of homeowner financial woes are creeping up, too.

"In the first two months of the year, mortgage makers served 700 Orange County borrowers with formal default notices - the first step toward foreclosure. That's up 31 percent vs. 2005."

Those are the far burbs. Probably a solid hour on the Metra (their Caltrain, only way better), almost 1.5 hours from Crystal Lake. When i lived there Crystal Lake was where people moved to die. So you're looking at 3hours commute by rail per day (to downtown), or 3-4 by car on the Northwest Tollway then the Kennedy Expwy. No thank you.

You could really only live in St. Charles if you worked in the West of Northwest suburbs, not downtown Chicago. That is unless you don't mind getting up at 5:00am and returning home about 8:00pm on a short day.

*West OR Northwest suburbs

"The gold standard was abandoned for a reason. It makes it impossible for the government to ease a bad social situation" - astrid

Astrid, it is government intervention that causes bad social situations (the Great Depression in point). The last thing we want is more government intervention. The government can't possibly predict or fully control the free market and when it tries we get misallocation of resources that lead to things like asset bubbles. If the government had been hands off, those problems wouldn't exist in the first place. In other words, the free market can take care of itself better than any single governing entity.

"I’ll go with an easy to supervise printing press that is at least nominally controlled by the American people." -astrid

The only problem printing money solves is the problem for the government of separating you from your wealth. For the "American people" it has never solved anything nor will it ever.

"The ancient European soverigns used to start debasing their coinage" -astrid

Yes, they did that by producing new coinage with less gold and more of another less valuable metal. But gold itself was not debased and people quickly came to know the difference between these less valuable coins and those with more gold and treated them as such. The King's attempt to steal required the circulation and acceptance of these new coins as equivalent to the old ones. This didn't always succeed or succeed for too long.

"... you have none — and I mean 0 — monetary control in a pure commodity currency system" - Randy H.

Yes, it would be more difficult to swindle the masses in that situation, wouldn't it? I'd prefer to leave control of the free market to the market. That's why we call it a "free" market, no?

"That is the USD is tied to gold at xGLD/1USD and the EUR is tied at xGLD/1EUR, then they are by nature fixed against each other" - Randy H

Imagine that! Going anywhere in the world and not have to do that currency exchange math in your head everytime you pay for something :-). Gold is the same anywhere in the world. That's why it was used as a global medium of exchange in the first place.

"This means that no coutry has any monetary power" - Randy H.

I'm beginning to get the impression that you believe monetary power is a good thing :-). Perhaps for the few who have that power and their close friends. You're not related to Greenspan, are you?

"You are describing microeconomic price function, not inflation. Inflation is measured at parity, meaning that the price function is adjusted for purchasing power" - Randy H

There's a little piece of the puzzle that you're missing. If the new money where introduced in such as way as to immediately be available to everyone, immediately affect all price levels for all products, immediately have the affect of increasing everyone's income proportionately, then yes, monetary inflation would be a zero sum game. But this is not the real world. If I magically doubled your savings account balance by printing new money and depositing it there, you would be the sole beneficiary of that new money at the expense of everyone else in the system. I haven't added anything of value to the system, I only transfered a percentage of the total purchasing power of money to you from everyone else. This is how monetary inflation adversely affects everyone but a select privileged few.

HELIBEN WILL SHOW NO MERCY FOR HOUSING

In a speech to the Economic Club of New York this week, he said he would not let a faltering housing market deter him from the necessary action to wring inflation out of the system.

In other words, no mercy now, and no bail-out later, regardless of warnings.

frank,

It's somewhat unlikely that you're going to win a market fundamentalism argument with me, but I enjoy the challenge. I am about as close to a market fundamentalist as exists without being a mindless ideologue.

I’m beginning to get the impression that you believe monetary power is a good thing :-) . Perhaps for the few who have that power and their close friends. You’re not related to Greenspan, are you?

Monetary power exists whether it is utilized as a lever or not. If you have an alternative to neoclassical the IS-LM model, please proffer it forward (and collect your Nobel on the way out). The question is not whether monetary power exists, but whether we use it as a lever we pull or we relegate that power to other countries to pull to their end. This is the problem with these models once you introduce aggregate demand, aggregate supply, and capital flows. There's no free lunch.

A fixed exchange system merely transfers inflation around, it doesn't prevent it at all. Worse, it give resource extractors inflation driving power and puts resource consumers in an inflation-taker position. We switched off of the gold standard not because of some conspiratorial debt crises, but because of the rise of energy commodities and the outrageous inflation that OPEC nations were hoisting upon the west.

As to the market resolving capital allocation, I suggest you look more deeply into the well studied phenomena of market local maxima. Free markets are incredible at quickly optimizing to a local efficiency. They are less good at finding greater efficiencies outside of that. They get stuck in suboptimal points and nothing aside from catastrophic market failure or government intervention will ever move them off of local maxima. This is why we have no examples of sustainable, purely free markets historically. There is a prerequisite to a functional, practical free market: a lawful society free of coercion and able to enforce market behavior and recognize painful externalities.

It’s somewhat unlikely that you’re going to win a market fundamentalism argument with me, but I enjoy the challenge. I am about as close to a market fundamentalist as exists without being a mindless ideologue.

I am a Stiglitz-loving market fundamentalist. :)

Yhought this was funny from Ben's blog...
Two all beefy patios, special cost, borrowed lettuce, cheesy people in a pickle, with bunions on a seasame seed bun. :roll:

Frank,

Please correct me if I’m wrong but the bad social situations of the Great Depression was not due to excess government interventions. The 1920s was known to be an era of laisse faire government. Ditto for the numerous economic crises of the late 19th century. In those instances, it was the lack of government oversight structure that led to credit bubbles and speculative behavior. The government didn’t come up with regulatory bodies because it liked to put handcuffs on progress, it was because a large movement of people demanded the oversight.

Can you elaborate on how the government wants to separate me from my wealth, beyond the legal obligations my elected representatives have agreed to place on me? I might not like everything these people do, but I still have nominal control over them.

While currency debasement can be corrected, is the end result superior to fiat currency? If the American government arbitrarily debased the dollar, people will start bartering and flee into substantive currencies. I think you’re assuming that the American government is a completely uncontrollable beast. I don’t think it has crossed that bridge yet, and that numerous checks exist to dissuade serious fiat currency shark jumping (via hyper-inflation).

there is also Boston Asbestos Cancer Lawyer

Greetings to one and all! My name is Anastasia Pickens, from Seattle, Washington. Your Blog was super easy to navigate, informative, and it contained most of the info I needed for my college research report. Have a fantastic day, thanks so much!

Randy I enjoy the discussion too, and for the sake of us all, I do hope that I am partially wrong about current economic practice and what I call "The Alan Greenspan Experiment" that has brought about the greatest increase in liquidity the world has ever seen. However I am not convienced that current practice is correct, and therefore continue to prepare for the worst.

Meanwhile... you say that "monetary power" always exists. If you mean that money in a free market influences prices through it's own inherent supply and demand, you are correct. I assumed what you meant by the term was power yielded by the *government* over money. While this also exists with non-fiat currencies, its magnitude would be greatly marginalized.

Ofcourse the government could always just simply dictate the price levels directly like it did after the 1929 crash; but that at least would be out in the open and considered an extreme measure (ie. they wouldn't get away with it too often or for too long).

"Nobel prize"

F.A. Hayek already collected the Nobel Prize for that... I'm too late :-(.

"A fixed exchange system merely transfers inflation around..."

If you don't acknowledge that monetary inflation is different than price inflation, then we'll just go round in circles. I contend that monetary inflation is bad and price inflation is it's consequence. Price inflation however has other causes (e.g. supply & demand of products) and in those manifestations is perfectly fine.

"There is a prerequisite to a functional, practical free market: a lawful society free of coercion and able to enforce market behavior and recognize painful externalities."

That goes without saying... when we say free market we don't mean "unlawful" market. The government's job should be to provide the lawful environment in which a free market can operate. It's job should *not* be to manipulate the market by adjusting interest rates, enacting trade tariffs or buying securities.

Stuck on local maximas? Hardly. Human action in a free market can often find surprising pathways to places thought unreachable. I suggest you read "The genetical basis of social behavior" by William Hamilton for a very influential view on human behavior in that regard.

No national economy exists that is the ideal of a free market. The term "free market economy" usually refers to an economy that approximates the ideal by virtue of having a government that engages in little or no interventionist economic regulation. That's the best we can hope for.

frank,

I haven't read Hamilton, but will be sure to take him in before our next encounter. My studies in the phenomena of local maxima comes from Hubbard and Beim (Columbia Business School). Admittedly, most of their research is of a global macro nature.

My definition of inflation comes from Mankiw, the well known neoclassical economist. The popular definition of inflation is "price increases", as he acknowledges. But the economic definition is categorically not micro economic in nature and has nothing to do with specific supply and demand, only with macroeconomic aggregate supply and aggregate demand in conjunction with the quantity theory of money.

As Mankiw puts it: "Thus, any system of commodity money eventually evolves into a system of fiat money once the economy reaches a sufficient scale. Notice that in the end, the use of money -- any type of money -- in exchange is a social convention: everyone values money, fiat, commodity backed or direct commodity, because they expect everyone else to also value it."

Notice that in the end, the use of money — any type of money — in exchange is a social convention: everyone values money, fiat, commodity backed or direct commodity, because they expect everyone else to also value it.

Very true. Purchasing power is nothing but a belief system, which is inherently fiat.

"Hell NO am I going to reward those fat bastards for screwing things up if it comes down all ugly."

I totally agree. America cannot afford to bail these guys and set up a gargantuan moral hazard for decades to come.

Rat_Patrol,

SJMN doesn't have my choice.

No, not worried and can't wait to see the Bay Area housing price drop by half at least.

athena peter p, astrid,

unfortunately bailing out these fat bastards is a must, either by the state or by the fed. We cannot afford to have the house of cards brought down, do you want to see massive bank failure? How can FDIC foot its promise of paying up to $100K per account when there is a massive bank failure? Do you want to see desperate gun owners ending up on the street? We good savers will have to chip in more or less, either through inflation brought by liquidity injection, or through lower purchasing power of USD going forward.

Although I hate the idea of paying for these bastards and minimize my exposure to asset classes that are likely to get taxed in bastard-saving effort, I am still for saving their asses from a social stability point of view.

This from todays Santa Barbara newspress

"over 70% of the loans made are neg-am adjustables"

I truly hope they drop the soap.

An ideal end to the housing bubble....

To hear the weeping of the spouses and children as the agents and brokers are executed in public, their organs harvested to supply the middle class of India with hearts, lungs and kidneys.

Another ideal end to the housing bubble...

The Geico Gekko is sitting in a cozy chair saying, "you see mate, told you it wasn't a good idea to be spendin' 1/2 of your hard earned bread on housing. Shoulda rented and spent it on car insurance with Geico. Money well spent. Chin up then. How's yer mum?"

Home buyers won't be bailed out, mortgage lenders, banks, or whatever American entities holding the subprime bags will be bailed out.

If a FB just borrowed to the hilt for a McMansion and at the end of the day cannot pay his bill, he will either need to file for bankruptcy or better still, carry on that debt obligation till inflation makes his debt burden lighter.

Our government doesn't give a damn about the individual home buyers or home debtors, it cares about businesses, especially big businesses. So anyone who borrowed more than they could afford in the last 2-3 years will end up royally screwed. Sadly enough, these little bagholders are usually the insecure trolls on the blog, not the big player on the MBS food chain or the big banks or builders.

I like athena more every time I read her.

We shall see how true those making repeated "free market" claims are to their ideals when the shit hits the fan. Sarcasm aside, this is the crux of my repeated droning that one must beware of "free-market-fundamentalists" in free-marketer clothing. They are quick to cry "hands off the market" until they end up on the wrong side.

I fear that Athena's wish will go unrealized unless we see such a severe collapse that it finally breaks the political lock the NAR lobby holds over Congress. Perhaps then we'll see an appropriate level of regulation and standards applied to this enormous, strategically critical industry.

What I wish is not really that Realtors(tm) become anathema. Rather I wish to see them disparaged for a while, then reformed. I envision a new licensing regime which drives about 98.9% of existing real-estate-sales-drones out of the business, mainly because it's just too hard to pass. I picture them studying up on their linear algebra and industry standards so that when they make forward-looking statements which will critically determine the future wealth of almost every one of their clients, they are credible enough to have earned that great responsibility.

I wish to see them and their industry do what's in their clients' best interest not only because that's what they have to do regulatorily, but because when they don't they lose business for having earned the reputation of being sleazy. There will always be "Payday Loans", which operate at the edge of the law, and desperate, uneducated people who patronize them. But I'd like to see the same stratification happen in real-estate with agents, brokers and creditors.

As it stands now, there is absolutely no difference between realtors(tm) akin to the difference between Vanguard, Bank of America, and Check-to-Cash; all the realtors(tm), brokers and mortgage types are just Gary Coleman in a leased Lexus.

Owneroccupier,

I know we have to bail out the banks and lenders to some degree (in exchange for more supervision and tighter lending practices) to avoid system failure. But do we really need to bail out irresponsible realtors and home-debtors? I don't want them to think that Uncle Sam is gonna bail them out every time they make a bad decision.

There has to be a punititive way to go about this so that they're taught a lesson, the kind of lesson the Great Depression taught people about abusing credit and living above their means. I want to see suicides, I want to see people publicly disgraced, I want to see the ringleaders locked up behind bars, I want to see the MLS monopoly broken up. I want there to be severe consequences so that no one even dreams about government bailout as a plausible exit strategy for many years to come.

I know that sounds harsh, but I really think a quick and severe economic lesson is the only way America will learn and then get on with retooling the system.

SQT, LOL!

I've seen a lot of that kind of stuff lately. On a brighter note, I just saw the first hedge-fund advertising for an analyst to do a fund play on the coming downturn (in commercial, not residential, though).

As for the big players. I want them in government receivership. I want their executives locked up and humiliated, I want their shareholders to get nothing. I know I will pay to keep the overall financial system afloat, but I want the individuals responsible to be hurt badly and made an example to the rest of the population.

SQT,

I approved my own moderated comment. Hope you don't mind.

hate to rent,

I'm not sure I'd go so far as to wish a depression. A depression will probably wipe out whatever is left of America's middle class, many of whom are now teetering on the edge. Also, America's past record for climbing out of depressions isn't too good. I guess I just most a maximum of sound and fiery to scare Americans into economic and political sanity, while not overly damaging the functional part of the underlying structure.

FDR's New Deal era programs may have laid the foundation for post war prosperity, but it was WWII that really took America out of the Great Depression. I know the stats show that America was showing signs of recovery by 1939 or 1940, but by that time, the Axis powers were already positioning themselves for war.

Well, I'm hoping for a scenario where the perception of awfulness is sufficient to bring changes to people's behaviors and to improve the overall system. I don't know if that's likely, but that's my hope. I'm resting my hopes in the power of shame, on a massive scale, to force people to behave better.

I wish we had a resident behavioral scientist.

Well, we can all blame my boyfriend if the world goes to hell in a hand basket.

I told him to get cracking on cold fusion four years ago. But no, he'd rather spend his spare time on rotisserie baseball. :)

wow, i'm agreeing and disagreeing with folks all over the place

Frank,
Please correct me if I’m wrong but the bad social situations of the Great Depression was not due to excess government interventions. The 1920s was known to be an era of laisse faire government.

yes, it was due pretty much to wild'n'crazy speculation and capitalist boom/bust cycles. pretty similar to dot com bust and housing now.

but i agree with frank about critiquing the 'local maxima' theory, and the wild'n'crazy places irrational markets will go. i wouldn't necessarily trust the 'theorising' of any business school in particular, a la postmodernism: 'incredulity toward metanarratives' etc.

in fact, a friend (colleague?) of mine here, frank stilwell, set up the 'political economy' school at sydney university rather than a school of economics, selecting the name to differentiate from neoclassical 'dry' economics schools...

just a question of perspective - but randy's contributions and analysis background are second to none on this site...