>To: Ed Weick <[EMAIL PROTECTED]> >From: Harry Pollard <[EMAIL PROTECTED]> >Subject: RE: Faculty Lounge: Pushing on string >Date: Mon, 19 Nov 2001 11:40:07 -0800 >Reply-To: [EMAIL PROTECTED] >X-Topica-Id: <1006204298.inmta008.10762.2510412> >X-Topica-Loop: 2000001637 >List-Help: <http://topica.com/lists/faculty_lounge/> >List-Unsubscribe: <mailto:[EMAIL PROTECTED]> >List-Subscribe: <mailto:[EMAIL PROTECTED]> >List-Post: <mailto:[EMAIL PROTECTED]> > >Ed, > >Referring to paper money, you said "people prefer to hold (or 'hoard') it >rather than invest or spend it." > >When I asked if they "kept their money under the mattress" in my usual >inimitably nasty fashion - you said > >ED : "They keep it where they think it's safe. Mine is in a mix of bonds, >mutual funds and safe stocks which are easily convertible to cash, and I'm >leaving it right there for the time being instead of spending it or >investing it in something new or different. Some people may indeed stuff >it under their mattresses." > >It is likely only to make a poorly sprung mattress more comfortable. But >look at the rest of what you say. You invest in "bonds, mutual funds and >safe stocks". I think that for thousands of years, in the absence of a >stock market, people hid gold under the floor against emergencies - a >rather better idea than stuffing paper promises under the mattress. > >However, this whole line of discussion shows the poverty of modern >neo-classical economics. The reaction of a classical analyst, told that >people should "spend their way out of a recession", would be immediate. > >But, when he had stopped rolling on the floor with laughter - he would >ask: "What happens to the money you don't spend, but invest? Doesn't >someone spend it on factories or something?" > >I used to do something I called "Chasing a Keynesian around the economy". > >When one would bring up the non-spending argument, I would ask what they >did with their money. "They prefer to invest it rather than spend it." > >So, your money is used to buy a factory. Isn't that spending? "Well, it >might be used to buy an old asset, rather than building a new one. So, the >money doesn't build a new factory. It buys an old one." > >The owner of the old asset. What does he do with the money he got from the >sale - spend it? > >"Not necessarily. I might just put it in a bank." > >So, what does the bank do with it? > >And so on, and so on. > >I stopped doing this because it makes the guy seem such a fool and I >really didn't want to do this. I wanted him to rethink. Unfortunately they >never seem to. They've learned nonsense, but it's the only nonsense they >have, so they must hang on to it. > >Trying to meddle with money to solve economic distress is stupid. Whatever >effect you get, the economic distress is untouched. Yet, the money myth >persists - along with all the other silly theories of depression. (With >regard to the these depression theories, Paul Samuelson suggested that a >diligent student could prepare a list that would 'run into dozens'.) > >Of course meddling with money can cause problems, but so can the electric >grid failing, or the oil pipelines rusting away, or any other interruption >in the supply/demand equation. However, even with such catastrophes, a >market economy handles them quickly and efficiently - while the controlled >economy is spending 6 weeks forming a committee to report on the trouble. > >Something to tuck away and be concerned about is that few among the legion >of economic scientists seem to have an inkling of why we are in recession >(that's a nice word for the middle class to use instead of depression). > >Perhaps, worse, they also have no idea why we had the long period of >apparent boom. Diligent economists - like Samuelson's diligent students - >can offer dozens of possibilities - but few actually know. > >(Of course, Keith, they don't even have the advantage of bunch of >mutually exclusive, properly defined, basic concepts.) > >You said about spending our way out of depression : > >ED : "Why is it ludicrous? Roosevelt tried it during the 1930s. Wartime >spending ended the Great Depression." > > From rock bottom, the US economy gradually improved during the 30's until > 1938, where it was still a mess, without doubt exacerbated and prolonged > by the Smoot-Hawley tariff. > >Then, it began to go down again. I don't altogether fault Roosevelt for >this. Neither he, nor anyone else, knew why there was a depression - or >how to deal with it. So, he tried anything and everything - a palliative >for every day of the week - none of which worked. > >You said: > >ED : "Wartime spending ended the Great Depression." > >At this point you have what you need to tell me what ended that Great >Depression. It wasn't spending, but what was it? > >You added: > >ED : "Post-war spending on reconstruction accounted for the boom that >lasted into the 1970s." > >Again, you have to be a little more basic as you look at "post-war >spending". The relationship of spending to the cause of boom and slump is >like the relationship of a thermometer to the warmth of a room. > >If you are cold, you perhaps have two choices. You can light a fire, or >you can put a lighted match next to the thermometer and when it soars to >90 degrees, you will begin to sweat - won't you? > >Connecting the business cycle to spending is equivalent to connecting >the temperature shown by the thermometer to the warmth of the room. > >You said in answer to my . . . : > >> > HARRY :Hasn't gold been around - as a measure of value - for umpteen >> > millennia? >> >>I recall that back in the 1970s, the price of gold was about three or four >>times its current price. > >Gold was pinned to $35 an ounce for a long time. (Actually the dollar was >being pinned to one thirty-fifth of an ounce.) When it was freed prices >shot up as always happens with anything that is suddenly released to the >market. Went up to $700-$800 an ounce - as I recall. (Or, if you wish, >the dollar fell to one eight-hundreds of an ounce.) > >I doubt that much changed hands at those prices, but I can't remember. > >However, the market worked - as always. The price fell to a more >reasonable figure for those who buy and sell. We should remember that the >market actually does nothing. All that happens is that the desires of >people are reflected in the market. We may not like their desires, but >that's another matter. The vicar may bemoan the fact that the village has >one church and 10 pubs - but he shouldn't knock the market (he will). > >It used to be that when the difference in price of gold exceeded the cost >of moving it, then gold would flow to the higher priced place. If it cost >25 cents an ounce to move gold from Canada to the US and the market price >in the US had risen to (say) a $1 difference - gold would flow from >Canada to the US until an equilibrium was reached. > >Now they are more sophisticated. In (I think) the Chase Manhattan Bank, >the basement has a number of alcoves with barred doors marked "Kenya" and >"Poland" and suchlike. In each are gold reserves. If an imbalance arises >between Kenya and Poland, some lackeys load up some gold in the >appropriate alcove and wheel it down to the other. Now the countries are >in balance again. > >That's modern technology for you. > >The whole point of basing your state issued currency on actual >commodities, such as gold, is that you are forced to be honest. In the >shopping malls, we couldn't care less about using gold as a measure of >value - rather like a yardstick. > >So, we use dollars whose value is somewhat fictional and which steadily >reduces in value with every passing day. Until, as happened recently, it >is found that the $4 minimum wage is only worth $3. (I've forgotten the >actual figures.) > >So, what do we do? We raise the minimum wage to $5.50 - from which it will >gradually depreciate to $4 (which actually is only $3). > >Yup, Ed, economics is a real complicated subject, not for the polloi to >understand. We must get our understanding from the television pundits. > >Oh, yes. The basic cause of the depression? - Well, it isn't >"under-consumption" (get people to buy - quick). It isn't >"over-production" (get people to buy it - quick). > >It is underproduction. > >That's a decision arrived at by profound, but not difficult, analysis - >using people as the basis for the study. If you want to understand a >sensible political economy, you must study people - not a derivative, money. > >Harry >________________________________________________ > >At 05:20 PM 11/18/2001 -0500, you wrote: >> > Ed, >> > >> > Couple of things. >> > >> > You said: >> > >> > ED : "There is plenty of liquidity (money) in the economy, but people >>prefer to >> > hold (or "hoard") it rather than invest or spend it. I'm not quite sure >>of >> > why they behave this way, but it may be because, under conditions of >> > considerable uncertainty, they see the potential return on their >>investment >> > or expenditure as being negative - i.e., under the circumstances, they are >> > being "rational maximizers" by holding onto their money." >> > >> > HARRY :What do they do "with their money"? Put it under the mattress, >> where it still loses value, but without any interest to offset the loss? >> >>They keep it where they think it's safe. Mine is in a mix of bonds, mutual >>funds and safe stocks which are easily convertable to cash, and I'm leaving >>it right there for the time being instead of spending it or investing it in >>something new or different. Some people may indeed stuff it under their >>mattrasses. >> >> > The present campaign, asking us to spend our way out of recession is >> > nothing short of ludicrous - unless your controlled economy is coming >>apart >> > at the seams and you'll try anything - absolutely anything. >> >>Why is it ludicrous? Roosevelt tried it during the 1930s. Wartime spending >>ended the Great Depression. Post-war spending on reconstruction accounted >>for the boom that lasted into the 1970s. The economy was pretty active >>during the recent fibre optic and dot.com run-up. When money circulates, >>goods move and production and employment rise. >> >> > You continued: >> > >> > ED : "My general point is that, under >> > conditions of instability, governments will do what they believe they have >> > to do whether a currency is pegged to a commodity or not. Potentially, >> > everything is in flux." >> > >> > And the first thing they do is divorce their bits of paper from the >> > commodity. If your piece of paper promises to pay an ounce of gold, that's >> > what must be delivered. So, divorce is immediate. >> >>Sorry, but I prefer a stable, well managed currency to an ounce of gold. My >>point is that anything can be well managed when social and economic >>conditions are stable, as they were for a time during the gold standard. >>However, stability is rarily the prevailing human condition. >> >> > You added: >> > >> > >> > >ED :"Nothing ever stands for all time." >> > >> > HARRY :Hasn't gold been around - as a measure of value - for umpteen >> > millennia? >> >>I recall that back in the 1970s, the price of gold was about three or four >>times its current price. >> >> > Certainly modern currencies stay around for intervals too short to >>measure. >> > (Yesterday's dollar is not the same as today's dollar.) >> >>I'm trying very hard to recall what I learned about the gold standard many >>years ago. What I seem to remember, a little vaguely I must admit, is that >>it was not so much about maintaining price stability in one country as about >>fixing the international value of currencies and the settlement of >>international payments. You could still have inflation and deflation in a >>given country, and it would seem that the gold standard could be >>instrumental in this. Under a strict interpretation of the gold standard >>which, I believe, would have viewed gold as the real currency of a country >>with paper as its derivative, a country in deficit on its balance of >>payments would make restitution by shipping out gold, thereby contracting >>its money supply and deflating prices. When it had a surplus, it would >>receive gold, thereby increasing its money supply and inflating prices. >>However, I suppose that under a less strict interpretation a country could >>still manage its currency and not expand or contract its money supply >>regardless of how much gold it held, but it would have to redeem money for a >>fixed amount of gold on demand. I believe that is how the gold exchange >>standard worked. >> >> > Krugman's remark must have been said with tongue firmly planted in cheek. >> >>I read it somewhere. It may not have been Krugman. However, under >>desperate conditions, it would be a way of making people part with their >>cash. >> >>Ed Weick > >****************************** >Harry Pollard >Henry George School of LA >Box 655 >Tujunga CA 91042 >Tel: (818) 352-4141 >Fax: (818) 353-2242 >******************************* > >==^================================================================ >This email was sent to: [EMAIL PROTECTED] > >EASY UNSUBSCRIBE click here: http://topica.com/u/?clvXW5.clDFko >Or send an email to: [EMAIL PROTECTED] > >T O P I C A -- Register now to manage your mail! >http://www.topica.com/partner/tag02/register >==^================================================================
****************************** Harry Pollard Henry George School of LA Box 655 Tujunga CA 91042 Tel: (818) 352-4141 Fax: (818) 353-2242 *******************************
