patrick.net

Here's one interesting alternative...

"A Free-Market Monetary System" by Hayek

http://mises.org/story/3204

By the way, why do we ever have the gold as money debate? Gold was absolutely and effectively put to rest in the 1970s. In fact, any hard currency suffers from the same problem s gold: to increase the monetary base you have to go dig up more stuff, some areas have more stuff than others, blah blah blah.
There are certainly things we can do to make fiat currency more accurate, and I suspect we will be doing them in the near future.

Randy and I have had long and heated debates on this very blog for several months back in 2005 when he said that the then current economic conditions would not result in a deflationary outcome

Then I stand corrected. Apparently I have only read RandyH's posts since his change of view, possibly a change infuenced by you.

frank says
Inflation is a net expansion of money supply and credit and deflation is the opposite, a net contraction.

Sounds like MISH:

http://globaleconomicanalysis.blogspot.com/2008/06/is-inflation-scare-over-yet.html

Of course, this all starts with a proper definition of inflation. In Austrian economic terms, inflation is an expansion of money and credit.

This isn't new here. Haven't RandyH, Brand, Zepher, Duke, and others made reference to the Austrian school?

Keynesian, Monetarist, Austrian – all these views have worthy and useful points. And they each have their own bias and imperfections.

It is like the three blind men describing the elephant by each holding one part – one the trunk, one the leg, and one the tail. Each is certain of his description (a snake, a tree, a rope), but none is very accurate of the entire animal. Understanding the entire picture takes more than any single bias can tell us.

My own bias is a blend of the schools. However, the blend varies. On fiscal issues my bias is mostly Keynesian, on monetary issues my bias is very Monetarist, and on cycles my bias is the Austrian view.

http://mises.org/story/3226

As for defining inflation I prefer the more traditional view that inflation is a rise in the general price level.

Of course, it is usually caused by expansion of money (&credit). But expansion of money will not cause inflation if the supply of goods and services expands at the same or faster rate.

One could also cause inflation by reducing the supply of goods and services without changing the supply of money and credit.

Inflation and deflation are all about the relationship between the effective supply of money vs. the effective supply of what can be purchased with it.

Hey Patrick.

How about a thread on the possible future bankruptcies of municipalities?

"...to increase the monetary base you have to go dig up more stuff"

Well, your Keynesian bias is certainly evident.

The whole idea behind a gold standard is such that the monetary base cannot be easily increased. Indeed, there is rarely a case to do so given that innovation and efficient production naturally lowers prices.

Lietaer and "script currencies", oh yes. I believe, Wörgl, Austria in the early 1930s experimented with such an idea. Unsound money by any other name, is just another Keynesian scam, imo.

The idea behind Lietaer's local currency is that there's a hoarding fee (in Worgl, Austria it was 1%/month) which in effective is like negative interest that in effective guarantees inflation. It destroys savings by transferring wealth from savers to the town's treasury so they can run soup kitchens.

Our system already has a much better investment motivation, it's called interest. It's better because it's rate is determined by the market (that is ignoring the Fed) and the rates adjust to ensure that investment meets demand.

As for defining inflation I prefer the more traditional view that inflation is a rise in the general price level.

That is a somewhat ironic as that is the contemporary definition. Historically inflation simply referred to and expansion of the money supply.

Then I guess what was once old is now new. It was the textbook definition several decades ago.

I am not sure the Euro will fare too well given the disparate interests of its member nations, but that's a different discussion.

Can't find much on the web regarding Lietaer's ideas. What makes his ideas different than other local currency schemes and more importantly how does it solve the problems inherent in fiat currencies?

I believe the nonsensical definition of inflation that you refer to was introduced has part of a political campaign intended to mislead the public into thinking that rising prices resulted in an increase in money supply rather than the other way around. Many people now realize the fallacy, but nevertheless they still refer to inflation as an increase in prices.

Can't imagine how that might work, if they are referring to Ithaca Hours on that link then I don't think his idea holds too much promise. From the Ithaca Hours home page:

"It’s also fun to get and use something other than dollars (remember how much you enjoyed or still enjoy using monopoly money)..."

I think that says it all.

Excessive expansion of the money supply is the most typical cause of inflation. Many confuse the most common cause of inflation as being inflation itself. Easy to understand making that mistake given the very high correlation of the two.

The classic economics textbook definition of inflation is a rise in the general level of prices. Has been such for many decades.

Well, things get dicey when your monetary system is based on debt.

Short term credit/debit inflation (and associated price inflation) will ultimately lead to monetary and price deflation. Debt can only be defaulted on paid back; both of which reduce and individuals purchasing power.

In reality, the interest on debt amounts to a tax on consumption. This can only cause deflation in the long-term.

Ultimately the problem does not lie with the currency but with the issuer of the currency, whether the currency is backed by gold or fiat, local or global. Can we trust the issuer to give us a money that preserves our savings and at the same time provides for productive and meaningful investment?

I like Hayek's idea of a free market issuer. That the free market should provide its own currency by methods subject to the same laws that govern it seems like a promising alternative.

If the government is to remain the issuer, then the gold standard is the only method we known to force discipline.

On monopolies, seems to me that the government interference in the form of favoritism (i.e. anti-free market) is what creates unwanted monopolies. As for monopolies in general, I don't view them as necessarily evil for several reasons:

1) if there is one company that provides the best product at the best price bar none, well then all the more power to them.

2) the existence of such a company does not bar any others from nibbling away at it's profits if there is a profit to be made by providing a better and/or less expensive product.

3) while such a company can conceivably use its market dominance to crush competition in ways not complementary with its service to the public (e.g. not improving the product and/or cost of manufacture), it can only do this at a cost and therefore cannot do this forever. And indeed it would need to be able to do this forever for as long as there is a profit to be made, the barrage of new competitors would never cease.

4) It's only via government favoritism or other non-free market mechanisms that unfavorable monopolies can maintain their dominance in a cost effective manner.

"While Im not an expert in Hayek’s views on ‘free market currencies’, its seems as though he is in accord with Lietaer."

If Lietaer is proposing competing currencies that do not implicitly or explicitly have the backing of any body of governance, then I believe the proposals are very much the same.

TOB says: One weakness I find with the libertarian cosmology is that they refuse to admit the problem of monopolization. As if the ‘market’ will correct it.

I arrive at the same headache reading mises.org. Most of the libertarian economists also ignore that we do not have a clean initial state. Without strict laws, the existing "haves" in the system can easily collude to remove competition in the new system. Their present resources are a huge sledgehammer with which they could create artificial barriers to entry. Any truly "free" market must also be accompanied by massive political reform, particularly on campaign donations and corruption. And lastly, it seems that many Austrian theorists restrict their analysis to simplistic models involving carpenters, glassmakers and cobblers. As we have just seen in the present financial crisis, the goals of the CEO are not necessarily aligned with those of the shareholders, which means that there is no reason to believe capital would truly be allocated efficiently. It seems naive to assume that corporations would behave in society's best interests without meaningful oversight.

frank says: 3) while such a company can conceivably use its market dominance to crush competition in ways not complementary with its service to the public (e.g. not improving the product and/or cost of manufacture), it can only do this at a cost and therefore cannot do this forever.

frank, a fundamental problem here is that:

0

Grh. Open/close braces.

0 is less than my lifetime, is less than forever. Summary: it might take 100 years for a monopoly to correct itself naturally, and the societal damage it causes might far outweigh the eventual benefit of its demise. Most of these theories appear to idealize the relationship between industry and society... in reality, industry must always be subordinate to society, so that the general good can be served by the efficient allocation of labor and capital. Man cannot serve his own machine.

"It seems naive to assume that corporations would behave in society’s best interests without meaningful oversight."

According to Austrian economics, corporations do NOT behave in society's best interests per se, but in the interests of making a profit. Only as far as those interests are aligned with those of society does society benefit.

You totally miss the boat when it comes to understanding this very basic premise.

I suggest you read mises.org before presuming anything else, like that they only deal with carpenters, glassmakers and cobblers.

You're also wrong to assume the theory places any reliance on what the CEO's true goals are. It's naive to believe that any oversight could possibly be a substitute for a free market, especially in light of the recent failures in oversight by the SEC, the FED, the sanctioned rating agencies, the FDIC and the GSEs (just to name a few) in our current crisis. Sheesh, what more could it possibly take to convince anyone of this fallacy?

Austrian economics does not preclude strict laws, this should be obvious if you read anything about it, and certainly does not condone corruption through campaign donations. They are against government intervention in the free market, which would make this all the more difficult.

I agree that there must be reform. We should start by eliminating the Fed, fractional reserve lending. the SEC, the FDIC and the GSEs.

"it might take 100 years for a monopoly to correct itself naturally,"

Based on what? That's ridiculous. Name a monopoly that existed any time in history that operated in a free market manner and didn't provide the best product or at the best price that existed for any appreciable length of time as such.

"in reality, industry must always be subordinate to society, so that the general good can be served by the efficient allocation of labor and capital."

If you mean that society, through free market actions, is efficient at allocation of labor and capital, then you'll have no argument from me or any libertarian.

I would go further and say the the free market is by definition the only truly efficient such allocator of capital and that a governing body can only guess and often guesses incorrectly.

For those who did not know yet, Tanta from Calculated Risk passed away yesterday. Here is the link:
http://calculatedrisk.blogspot.com/2008/11/sad-news-tanta-passes-away.html

What is it about Texas Congressmen and "original" ideas about economics? First it was Ru Paul. Now get a load of this guy....

www.tylerpaper.com/apps/pbcs.dll/article?AID=/20081130/NEWS08/811300328

U.S. Rep. Louie Gohmert, R-Tyler, proposed that the U.S. government stimulate the country's economy by collecting no federal income tax this year....
Gohmert said, as the current administration continues obligating trillions of taxpayer dollars to bail out failing businesses, a better, cheaper solution to revive the economy would be to suspend collection of the estimated $1.2 trillion the U.S. Treasury will receive in 2008.

Suspending the income tax sounds like a bad idea to me (although I would be happy to keep the money). I do think that suspending the tax would be less damaging and cheaper than what is currently being done. But that is not a good reason to do it.

Kewp,

What is the material (or "working surface") of the Save-A-Blade gizmo? I can't help but think that there must be a more low-tech solution to the whole thing. Something similar to the "strop" that they use in an old-fashioned barber-shop. Or at least in old movies :-).

How does the gizmo function, especially on modern triple and quadruple blades?

This has got to affect market psychology in the Bay Area:
Today, more than 600 properties currently on the market here are listed below $100,000.

This whole business about the protest and civil disobedience in Thailand is really bugging me.

The main-stream media are completely asleep and the reporting os atroucious, focusing on lame stories about airport closures rather than trying to explain what is really going on.

The only place I heard something remotely sounding like an analytic approach to the news was on Deutsche Welle TV (PBS). The reporter stated something to the effect that the PAD protesters wanted to take away the voting tights of the workers and peasants, and that the protest was bankrolled and organized by the upper middle class and the wealthy . Imagine that.

Even Wikipedia was no good. The only useful tidbit I found was

The PAD also demanded "New Politics," the amendment of the constitution in ways that would make Parliament a largely royally-appointed body.

In short, the protest in Thailand is by a bunch of anti-democratic pseudo-fascist royalists. Did anyone read that in the mainstream press?

Read BB's speech today, he is going to raw print to buy T
http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm

The great reflation begins.

OK I stand corrected, I believe he has already started, but it is a good thing that he is making it public.

Justme,

It looks like a strip of ultra-fine sandpaper. I think they claim it is silicon carbide.

The thing is pretty low-tech and is pretty similar to the 'stropping' you refer to.

It works fine on my Mach3 turbo. The 4/5 blade razors are like cheese graters IMHO. The blades are more like like wires (and about as useful).

Kewp,

Thanks. That confirmed the impression I got from the pictures.

Tanta was cute and intelligent, she had it all.

It makes you wonder that people like Paulson, Bush and even Cheney are still healthy and kicking around.

While I am on a geopolitical tear, here is another bothersome development:

Scores of dimwitted Bombay yuppies are on TV news and talk shows, whining about how the government did not protect them enough, babbling on about bipartisanship (god, not again) and demanding the heads of politicians.

Look, you have seen that "populist" approach to terror response once before, after 2001/09/11, Be VERY careful what you ask for. Your anger and distress will be exploited by those who want to channel your anger for their own benefit.

I have great sympathy for the people who lost their lives in yet another senseless terror attack, But please, do not make the situation worse by demanding immediate "action" before all the facts are clear and there has been time to cool off and consider the consequences. The terrorists would like nothing better than have India and Pakistan at each others throat. In fact, it is very likely to be their main motivation.

OO,

Which sentence of Bernanke's speech indicates raw printing to buy Treasury paper? Not a rhetorical question, I just could not spot it off-hand.

**

On another note, Bernanke apparently is saying that the Banks are NOT getting face value for the bad paper that they pledge as collateral at the various FedR funding facilities:

It should be emphasized that the loans that we make to banks and primary dealers through our standing facilities are both over-collateralized and made with recourse to the borrowing firm, which serves to minimize the Federal Reserve's exposure to credit risk.

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver--the provision of liquidity--remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in this facility will be minimized because the collateral will be subject to a "haircut" and because the Treasury is providing $20 billion of EESA capital as supplementary loss protection. Each of these approaches has the potential to improve the functioning of financial markets and to stimulate the economy."