Ed,
At 17:26 02/08/2010 -0400, you wrote:
Keith, a few more comments in this colour.
Replied to as briefly as I can below
Ed
----- Original Message -----
From: <mailto:[email protected]>Keith Hudson
To: <mailto:[email protected]>Ed Weick ;
<mailto:[email protected]>RE-DESIGNING WORK, INCOME
DISTRIBUTION, , EDUCATION
Sent: Monday, August 02, 2010 2:30 PM
Subject: Re: [Futurework] Usual Krugman rant
Ed,
At 11:45 02/08/2010 -0400, you wrote:
Keith, it would be nice for the world to have a common currency whose
value is invariable because it is based on a valued substance like gold,
The main value of gold, quite besides its cosmetic attractiveness, is
that it is largely not used for anything else and that its production is
expensive, low and fairly constant. Almost all the gold that has ever
been mined still exists as coin, ingot, or jewellery*. A currency that's
exchangeable with gold is therefore under constant discipline not to be
expandable at a government's pleasure. (*Most jewellery is in Asia where,
mostly, it is also considered to be a currency as well as a status item.)
A problem here might be that some countries, Canada for example, have
lots of gold to mine; other may have very little. How might one ensure
that everyone starts on the same page?
Like that of any other product it is the comparative cost of production
which is important. Some countries, even with large deposits of gold will
not produce it if it has even more profitable products to export. It can
get as much gold as it needs by simple exchange. A country with immense
resources (of gold or anything else) doesn't necessarily make it a growth
economy; conversely, a country with few resources (such as Japan up to
about 1985) can become very successful.
just as it would be nice to have a world that is peaceful and nicely
settled into economic patterns that vary little from year to year or even
from decade to decade. However that is not the world we have. Countries
vary greatly in terms of stability and the economic problems they
face. A stable country one year may be less stable the next.
Of course. And a weak government can make itself popular for a while by
expanding its money supply and making its people think they're better off
-- that is, until prices start catching up. Then, if a government is even
more foolish, it prints more money, etc.
If one follows the quantity theory of money, printing and issuing
currency may be important to maintaining a fairly uniform level of prices
as the economy grows,
Yes, to "issuing", no to "printing". If a government prints money without
correlation to real investment demand within its economy then it's
invariably tempted to print more than it should because it keeps the
electorate temporarily sweet and enables it to pay their taxes relatively
painlessly.
just as it would seem important to gather in currency if the economy
begins to slow and output shrinks. The central bank's job would be to
continually assess how much currency may be needed at a particular stage
of economic growth or decline.
A central bank needs to print money for only three vaid reasons:
1. to replace old banknotes;
2. to supply the temporary liquidity caused by the credit that commercial
banks create for their customers (in exchange for reducing the previous
liquidity of the customers' collateral which is sterilized by being lodged
at the bank);
3. to supply the extra money that is created when someone works harder or
longer (to buy an item that's additional to normal spending) or when a more
efficient method of production of an existing product has been devised.
This extra supply is automatic because the extra value subsequently flows
through the banks and they need more money for reasons of 1. and 2. above.
If a government (its central bank) prints more money than this then it's
taking a risk that it will be recoverable from extra taxation later. This
Keynesianism would have been a moderately good risk in the 1930s (because
there was still a great deal of pent-up consumer demand for existing goods
only affordable at the time by the middle-class and the rich.) But today
there is no chain of new consumer goods lying ahead that the masses will
work hard for and save hard for as they did during most of the
industrial-consumer revolution.
The kind of flexibility needed for proper economic management would
not be possible with a currency fixed in value to gold.
A country as a whole doesn't need any more flexibility than that supplied
by item 3 above. A government can't "manage" an economy anyway. At best, it
can tax it; at worst, it can stall it.
If the economy grew rapidly, gold miners would have to go out and dig
like crazy to bring in enough gold to ensure that there was sufficient
currency to accomodate the growth.
No they wouldn't, and they couldn't, because gold mining needs huge
investment and long lead times, now that all superficial gold has been
picked up. Unless investment in other products of an economy is penalized
then the production of gold these days can never be increased by more than
about 2% per year world-wide on average. If an economy grows more than this
then the the value of money automatically increases without any
acceleration of gold production. If money is based on gold then the price
of gold increases, unlike everything else which decreases relative to new
products or services brought about by true economic growth.
Well, maybe not. If a country in a growth position could not increase
its supply of gold, the value of currency fixed to gold would rise,
Yes.
as would prices and costs.
Not necessarily. The extra value of money would be spent on new goods and
services (if it's a true growth economy).
The ultimate result would likely a cessation of further growth and
perhaps even a collapse because entrepreneurs could not meet their costs
of production and people could not afford what was being
produced. Better leave the matter to central banks than to hoards of gold.
No, as per the reason above.
Monetary policy during periods of stability may need to differ
considerably from monetary policy during periods of instability and each
country will have to make decisions on what kind of monetary policy it
should pursue at a particular time. Having a common currency whose
value is based on gold or another currency will inhibit the kind of
action a country may need to take.
It would only inhibits those governments that wish to escape their real
problems by printing money.
Central bankers can be mean, tough, even nasty. They are unlikely to let
countries be frivolous. Well perhaps not all of them -- Zimbabwe for example.
Central bankers only came into existence when paper currencies became
detached from gold and they were needed to print more money for governments
or (to save governments' skin) to bail out the more foolish commercial
banks from time to time (which should actually be allowed to go bankrupt
like any other business -- tough luck on customers, but then it's tough
luck on employees when any business goes bankrupt).
Central bankers, like most everybody else in hard times, can indeed be
"mean, tough, and even nasty". But they are all highly intelligent also.
This is why they are all hanging onto their gold reserves (and indeed
increasing them according to many rumours) because at least they intend to
survive if paper currencies collapse.
The Euro provides and example of the kinds of problems a common
currency can raise.
The Euro is even less of a full currency than the dollar or pound is. Its
issuing bank, the ECB (European Central Bank), cannot create credit, nor
can it disperse Euros around among its EMU (European Monetary Union)
members to alleviate distress (as America can do among its States, or the
UK among its regions). (The European Union -- not the same thing as the
EMU -- can, and does, dispense some money, but this is only a very small
amount in total. It's only part of the EU's running costs -- the 2% fee
that the EU Commission charges member countries.)
That's enough from me. I have to get on with the rest of my life.
But is not this an interesting part of your life? It is for me -- far more
interesting than gardening, which I am now about to do.
Keith
There is now considerable economic variation among the countries of
the European Union. Some are doing quite well, others are facing large
debts and unemployment. Yet the latter cannot take the kind of action
that may be necessary because being tied to a "common good" can't permit it.
No, it's the constitution of the ECB which prevents it. (And, while I'm
mentioning this, the ECB was set up from the start with a considerable
amount of gold in its reserves. If gold is no longer supposed to be a
currency, what on earth is it doing there? It's there because all central
banks know that national currencies, including now the Euro, might fail
one day and gold is a reserve that can always be used in an emergency,
whatever governments and the ECB may say about gold being some sort of
medieval curiosity.)
I wouldn't be surprised to see the EU begin to disintegrate before
too long.
I think the EMU will, but the EU will probably continue as some sort of
political legacy in rather the same way as the British
Commonweaith still (barely) continues even thought the Empire has long
since gone.
Control of national currencies is not only important for internal
purposes, it can as I mentioned previously also be used strategically
in international trade. China keeping the renminbi low for trade
purposes is an example.
It's quite entitled to fix its currency in any way it wants because
that's what all governments did after the Bretton Woods Agreement in 1944
-- and then they remained fixed to the dollar. The only difference is
that, from 1944 until 1971, America was able to force all other countries
to pay any trade deficits they had (with America) as gold, America being
the only country that was able to fix its own currency with gold. China,
of course, didn't trade with America during that period and so it fixed
its own currency by tying it to gold. After 1971 when President Nixon cut
the link between the dollar and gold, America could have refused to have
anything to do with the renminbi -- by not trading with China. But it
chose to trade and on China's renminbi's terms.
So, I agree that a stable common currency would be nice to have, but
then so would a nice, quiet, stable and peaceful world.
Because China (and Russia and India and the Middle East oil countries)
don't like what the American government is doing to its own dollar
(pauperizing it) they now think it's about time we had a proper world
trading currency.
Keith
Ed
----- Original Message -----
From: <mailto:[email protected]>Keith Hudson
To: <mailto:[email protected]>Ed Weick ;
<mailto:[email protected]>RE-DESIGNING WORK, INCOME
DISTRIBUTION, , EDUCATION
Sent: Monday, August 02, 2010 10:18 AM
Subject: Re: [Futurework] Usual Krugman rant
Ed,
At 09:17 02/08/2010 -0400, you wrote:
Who's ranting? When it comes to employment, I don't see it as being
primarily about mass producing consumer goods. There are many things
that could be done to get people working and a Keynesian approach
would probably be needed to get them to be done. American cities,
roads, bridges and other vital pieces of infrastructure need to be rebuilt.
Try it if you want. But Japan tried heavy Keynesian spending for a
decade and somewhat less in the following -- but they were no better
off after 20 years than at the beginning.
Doing this might not employ all of the unemployed, but those who would
have work would spend a lot more money on groceries, housing and other
things they can't afford right now. Small businesses would benefit,
multipliers would come into play and at least part of the currently
depressed American world would reawaken. So, I tend to agree with
Krugman -- bring Keynes back into the picture and let's see what happens.
You'll get more of what we've had in the last 30 years -- declining
real wages for average people (at least for those in work).
Why, as Krugman argues, isn't government doing anything? It may be
the nature of the Obama administration. Obama's opponents sit there
staring at him and all he does is stare back at them. "Yes we can!!"
is long gone. And so much now is about the forthcoming
elections. Being perceived to be doing the right thing (really,
doing nothing) will stand a better chance of getting votes than doing
something would be.
Raising tax revenues by getting people working could be important in
terms of dealing with the deficit. Eliminating tax breaks for the
rich could also be important. The European powers may be in a
deflationary mode right now, but why should America be?
And going back to some kind of gold standard arrangement is not the
answer. It simply wouldn't work. It didn't work in the past,
Can you tell me when and where it didn't work?
so why should it work in today's far more complex world.
The gold standard worked for England for 150 years and most of Europe
for 80 on average and also for America for about 40 years -- all with
no inflation whatsoever. All was cut short by the First World War when
so much money was needed that it had to be printed. But then, later,
when governments tried to go back onto a gold standard they did so
without taking the subsequent inflation of the pound, dollar, mark, etc
into account. Result? More inflation -- and even more so after Nixon
cut off even international trade surrencies from gold in 1971.
As more and more Chinese, Middle East oil exporters and big investors'
money goes into gold and not dollars or government bonds, you can be
certain that gold, as currency, is quietly re-asserting itself. All the
Western banks are now grimly hanging onto what gold they still have
because it's their only one sure asset they have these days. It can
only mean one thing. We're going to revert to a gold standard -- or
another reliable world currency -- sooner or later, whether after yet
another chaotic episode like 2008/9 or by international agreement -- as
China is calling for -- remains to be seen.
Keith
Ed
----- Original Message -----
From: <mailto:[email protected]>Keith Hudson
To: <mailto:[email protected]>RE-DESIGNING WORK, INCOME
DISTRIBUTION, ,EDUCATION
Sent: Monday, August 02, 2010 2:13 AM
Subject: [Futurework] Usual Krugman rant
Paul Krugman is off on a typical rant this morning in the New York
Times. He observes that unemployment will probably grow in the years
ahead but says that there is "growing evidence that governing elite
just doesn't care?"
Of course they care! They care for their own skins in the coming
years. Every conceivable type of government cares about unemployment,
and has done so throughout history if it wants to maintain power and
sleep easy.
Paul Krugman refuses to entertain the idea that high and growing
unemployment is structural. Why? Because, even after writing
hundreds of op-eds over the years, he still thinks that Keynesianism
can supply the solution. It might have done so in the 1930s when
there was still a large tranche of still-expensive consumer goods
awaiting mass production and purchase by a substantial proportion of
the population. That's no longer the case. There's no long line of
desirable consumer goods visible ahead of us. As regards existing
goods, automation still proceeds.
So "Congress is sitting on its hands" is it? And the Fed is not
repeating inflation out of some sort of malignant obduracy, is it?
(At least there are some officials who learn from their mistakes!)
What's needed is not emotionalism on Krugman's part but some
objective analysis in order to restore his status as a Nobel
prize-winning economist and not a tub-thumper.
Well, I'll give him some pointers. What we need -- and pretty soon,
too -- is a total currency reform so that all advanced governments
can write off their existing debts and not cripple our children and
grandchildren with paying for their profligacy in the past few
decades. And, from then onwards, a currency system that will make
governments keep to sensible annual budgeting. We also need a
substantial educational reform so that there'll be a demand pressure
to expand or share the most interesting and highly-paid jobs. We also
need substantial administrative/political reform so that we don't
have a system whereby politicians have to selectively bribe this or
that section of the electorate in order to remain in power.
Keynes himself said something to the effect that governments always
fall prey to outmoded ideas of a previous generation of economists.
Well . . . that applies to economists, too.
Keith
Keith Hudson, Saltford, England
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Keith Hudson, Saltford, England
Keith Hudson, Saltford, England
Keith Hudson, Saltford, England
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