Perspectives on the global economic meltdown (Jan 26 2010)

[Sanjay M]

Neshant, you're right about the Gold Standard. also, another interesting observation is that this bail out culture in the US began in the early 70's after US went off the gold standard.

but going back to it now is pure insanity. i'd like to hear any proposals that would result in going back to the gold standard, without inflicting a multi-decade depression???

and yes, it will be a multi decade depression b/c the money contraction will be about 17 times. total currency value is 17 times the value of total gold reserves in the whole world.

There's no need to go cold turkey. Like I said, if you increasingly bring back gold as a parallel option, just by increasing the availability of electronic payment services offering gold as a payment option, then it will allow gold to make a gradual comeback by people voluntarily choosing to switch over to it. Gradually, the use of gold-securitized payment will spread and ultimately overtake the existing system of non-securitized fiat money.

One day, you could open up a stock exchange that offers gold as a parallel mechanism of payment for stock trades (in addition to the regular money channel), and that will allow people to even invest directly using gold-securitized money.

So the idea would be to gradually wean people away from fiat money, and back to gold-securitized money. Then it wouldn't be a sudden crash, and the new competing securitized standard would have had a chance to spread and make itself available to as many people as possible, before the old unsafe standard collapses.

The new standard gradually grows and becomes more vigorous and widespread, while the older standard gradually withers away. Those who become early adopters would benefit most, since they would benefit from a rise in their savings in gold as more people bought into it.

Again, I would point to the rise of digital electronic payment networks as the fundamental new enabler that makes it much easier to go back to gold-securitized payment. Fiat money has become redundant, and now also unsafe as well.

[svinayak]

I agree with him especially about how "money is pouring into the English-speaking economies from the developing world..."
But, I feel that this will soon change b/c of a resurgent Asia with higher savings and productivity and a steadily increasing young population.
The West with its huge debt and lack of industry will go to war while printing its way into the grave.

Where is the CT here.

[Pranav]

I feel that the gold standard is great b/c gold and and other precious metals have always been considered valuable. By reverting back to the gold standard, prices would adjust to the quantity of gold. Moreover, the gov can't just overprint like it is now. It would instead rely upon an efficient borrowing and taxing system.

Whenever you use just a single commodity (like gold) you put yourself at the mercy of monopolists.

[paramu]

Whenever you use just a single commodity (like gold) you put yourself at the mercy of monopolists.

Is this any different otherwise? It is monopolized by bankers. I would suggest nationalizing the money printing rights - more like our RBI. Some free marketers will cry about government inefficiency, but the government is answerable to people where as the bankers are not.

[Sanjay M]

I feel that the gold standard is great b/c gold and and other precious metals have always been considered valuable. By reverting back to the gold standard, prices would adjust to the quantity of gold. Moreover, the gov can't just overprint like it is now. It would instead rely upon an efficient borrowing and taxing system.

Whenever you use just a single commodity (like gold) you put yourself at the mercy of monopolists.

But who really has a large enough monopoly on gold to be able to tilt the entire market in their favour? That's the thing - gold is quite mature - it's not all in any one person's hands.

If anything, India's been buying up lots of gold, and I'm sure they're now benefiting from the rise.
But India has moved into gold because of the fear of the hyper-printable US dollar and the new bailout culture in the US.
Gold is the only way to fight back against the bailout culture.

[Pranav]

Whenever you use just a single commodity (like gold) you put yourself at the mercy of monopolists.

Is this any different otherwise? It is monopolized by bankers. I would suggest nationalizing the money printing rights - more like our RBI. Some free marketers will cry about government inefficiency, but the government is answerable to people where as the bankers are not.

True. A fiat currency, administered by technocrats, answerable to elected representatives, as well as directly to the people, is what would be best. Such as system need not lead to inflation - when the value of the currency is linked to a publicly declared, diverse basket of goods and services, with several hundred or perhaps even thousands of items in it, then it would be very hard for anybody to distort the monetary system, and it would also make the RBI directly accountable to the people. One needs some barriers to prevent uncontrolled inflow and outflow of money, and also some laws to prevent foreign ownership of some core assets.

[Pranav]

But who really has a large enough monopoly on gold to be able to tilt the entire market in their favour? That's the thing - gold is quite mature - it's not all in any one person's hands.

If anything, India's been buying up lots of gold, and I'm sure they're now benefiting from the rise.
But India has moved into gold because of the fear of the hyper-printable US dollar and the new bailout culture in the US.
Gold is the only way to fight back against the bailout culture.

Until quite recently (2004) the world price of gold used to be set at the offices of NM Rothschild & Co in London (http://en.wikipedia.org/wiki/Gold_fixing). Now, it would be quite difficult to give a reliable reference for how much bullion is owned by such firms (and their associates), and which gold mines they control - but let's just say that using a single quantity like gold would make a monetary system vulnerable.

[Neshant]

Start with financial history of the world - The Ascent of Money: The Financial History of the World is Harvard professor Niall Ferguson's book, published in 2008,

Niall Ferguson's book The Ascent of Money should be called The Descent of Harvard where the guy teaches. Its just a hurriedly written book that tries to capitalize on the financial crisis which was already unfolding.

The book itself is full of bull. He comes across as an apologist for Wall Street elites. How else can he come to the conclusion that hedge funds and major banks doing 'financial innovation' are guarding against financial risk when in fact 2008 revealed they were creating more risk than even entire countries could handle ? He also glosses over the great depression and revises history to suit wall street's ripoff of the public. I came to the conclusion that the boy is fishing for a job as a high paid CEO on a Wall Street bank/financial company and that book is his resume.

I don't think that guy is a good model for understanding economics.

I like some aspects of Ludwig von Mises Austrian school of economics. He lived during the 30s. His famous quote from back then :

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved."

If he is right, we are about to see a currency collapse be it through mass devaluation or outright default within the next few years. A scary thought indeed.

[ldev]

Since books are being discussed, "OIL - Money, Politics and Power in the 21st Century" by Tom Bower is good reading. While it is very well researched and gives a comprehsive history of the global oil business, it is also written in a style which will gladden the hearts of the numerous conspiracy theorists who have a flourishing cottage industry on the forum. I am only at page 99 of a 450+ page book though so my opinion is subject to change!

[Sanjay M]

Greek Default Seen by Almost 75% in Poll Doubtful About Trichet

Dollar Gains Toward Four-Year High Versus Euro on Rates Outlook

Clearly there's a strong belief that Greece is going to default in spite of the bailout money given to it. The shift away from the Euro towards the USD supports this idea.

Meanwhile, I've read that Goldman-Sachs is taking hedging positions against California's debt, since they likely see California as America's Greece, and since they are trying to keep themselves ahead of the curve in relation to market reactions.

So we're things are clearly moving beyond the level of bank defaults, and onto the level of sovereign defaults. This is the next new level of rot. Where can things go beyond that?
Why wait for them to?

All these things are the result of political populism. Therefore it will be necessary to seek value in something that is beyond the reach of political populism. Gold, as arbitrary as it may seem, is nevertheless solid and stable because its supply is beyond the control by populists, since it cannot be printed.

[SwamyG]

The Bilderberger Group was thought to be a CT too......... it still probably is in USA.

[Neshant]

True. A fiat currency, administered by technocrats, answerable to elected representatives, as well as directly to the people, is what would be best. Such as system need not lead to inflation - when the value of the currency is linked to a publicly declared, diverse basket of goods and services,

It would not work as nobody would be able to tell if those goods & services were being produced efficiently and profitably. The currency would remain over-valued (or under-valued) until a major problem arises (witness Greeks spending beyond their means as they could borrow at low german like rates). Once the crisis emerges and the flaw in the value of the currency is uncovered, its too late.

The whole objective is to remove so called technocrats and any other crats from the equation and let the market determine value on its own. No man is smart enough to figure out what the price of goods & services should be or what the value of money should be.

Its kind of ridiculous that all industries have to hang off every word from Bernanke everytime he decides to fiddle around with interest rates or print. He has no clue what the price of bananas should be. Nor houses for that matter. Why should anyone believe he knows what the price of everything else should be.

Such middle men are not needed. The only thing he ends up causing are distortions in the value of things and an imbalance in supply & demand. Then he goes about with more fiddling in an attempt to fix the problem he caused himself. That is why all human administered currencies end up failing.

[Pranav]

True. A fiat currency, administered by technocrats, answerable to elected representatives, as well as directly to the people, is what would be best. Such as system need not lead to inflation - when the value of the currency is linked to a publicly declared, diverse basket of goods and services,

It would not work as nobody would be able to tell if those goods & services were being produced efficiently and profitably. The currency would remain over-valued (or under-valued) until a major problem arises (witness Greeks spending beyond their means as they could borrow at low german like rates). Once the crisis emerges and the flaw in the value of the currency is uncovered, its too late.

The whole objective is to remove so called technocrats and any other crats from the equation and let the market determine value on its own. No man is smart enough to figure out what the price of goods & services should be or what the value of money should be.

Its kind of ridiculous that all industries have to hang off every word from Bernanke everytime he decides to fiddle around with interest rates or print. He has no clue what the price of bananas should be. Nor houses for that matter. Why should anyone believe he knows what the price of everything else should be.

Such middle men are not needed. The only thing he ends up causing are distortions in the value of things and an imbalance in supply & demand. Then he goes about with more fiddling in an attempt to fix the problem he caused himself. That is why all human administered currencies end up failing.

Efficiency would be taken care of by competitive forces. Technocrats would be working according to a set policy of maintaining price stability of the basket. There is no room for arbitrariness. The system would essentially be on auto-pilot. No need to listen to any Bernanke.

Actually the whole policy of trying to set interest rates is misguided. The interest rate is in fact not an independent variable.

[Sanjay M]

Technocrats cannot remain independent of politicians. People thought Greenspan was a faithful technocrat, but his keeping the interest rates low was clearly a result of a War-engaged Bush administration.

Because rates were kept low for so long, it created the bubble situation.

People are only able to curse Greenspan in hindsight - after it's too late - but nobody was hollering at him while the bubble was actually happening.

[Pranav]

Technocrats cannot remain independent of politicians. People thought Greenspan was a faithful technocrat, but his keeping the interest rates low was clearly a result of a War-engaged Bush administration.

Because rates were kept low for so long, it created the bubble situation.

People are only able to curse Greenspan in hindsight - after it's too late - but nobody was hollering at him while the bubble was actually happening.

Interest rate targeting is misguided. IMHO one should concentrate on the monetary base aka M0, which is the actual amount of cash (whether electronic or printed notes) in circulation. Interest rate is not an independent variable.

Also, with the system being essentially on auto-pilot, fellows like Greenspan would be rendered redundant.

[Neshant]

Technocrats would be working according to a set policy of maintaining price stability of the basket. There is no room for arbitrariness.

Such a system would be nothing but arbitary.

Price stability means price fixing. Which in turn assumes the so called technocrat thinks he knows what the price of something should be. But how would he know that. Its another Bernanke in the making.

To rig the prices of item A, he has to take resources from B. Of course, he has no clue whether B might actually have better use for that capital than A. He's just rolling dice like Bernanke when he fiddles with interest rates & printing.

All these systems of human intervention end up doomed with malinvestments and distortion of supply & demand. Then begins more fiddling to fix the situation.

[Pranav]

Technocrats would be working according to a set policy of maintaining price stability of the basket. There is no room for arbitrariness.

Such a system would be nothing but arbitary.

Price stability means price fixing. Which in turn assumes the so called technocrat thinks he knows what the price of something should be. But how would he know that. Its another Bernanke in the making.

To rig the prices of item A, he has to take resources from B. Of course, he has no clue whether B might actually have better use for that capital than A. He's just rolling dice like Bernanke when he fiddles with interest rates & printing.

All these systems of human intervention end up doomed with malinvestments and distortion of supply & demand. Then begins more fiddling to fix the situation.

No, price stability means adjusting the money supply so as to keep inflation at zero, or at whatever desired level (I prefer 1%), in terms of a large, diverse, and publicly declared basket of goods and services. Nobody would be setting prices of any specific commodities.

I am saying that this is better than linking the value of the currency to gold alone.

[Neshant]

Price stability means price fixing.

No, price stability means adjusting the money supply so as to keep inflation at zero

..which is price fixing.

"Managing" inflation is nothing but price fixing.

[Pranav]

No, price stability means adjusting the money supply so as to keep inflation at zero

..which is price fixing.

"Managing" inflation is nothing but price fixing.

Keeping the value of the currency fixed to gold alone is also price fixing, that too of a highly pernicious form.

[abhischekcc]

The Ascent of Money is a huriedly written book - but it purports to show that financial crises are nothing new - that they have always occured in history. So, the the point NF is raising in the book is - 'this too shall pass, do'nt worry, be happy.' It is a balm meant to keep people from getting agitated and doing harm to the elite (like ask for accountability and stuff).

Note that in the typical British way, he does not actually come forward and say it, but puts enough facts in the way so that you come to that conclusion all on 'your own'.

The technique is called 'Information Flooding'. I can name a couple of practitioners on this forum itself, but those guys would probably try to get me banned.

Some people know who I am talking about.

[Sanjay M]

..which is price fixing.

"Managing" inflation is nothing but price fixing.

Keeping the value of the currency fixed to gold alone is also price fixing, that too of a highly pernicious form.

No, gold is simply securitization. Price fixing would be trying to keep the price of specific goods fixed to certain specific amounts of gold. Certainly a return to gold standard does not guarantee that at all, just as it didn't before when it was in place.

[Neshant]

There is no inflation to be 'managed' under the gold standard.

Therefore there is no price fixing.

Nobody says gold should purchase X amount of goods. That is for the market to decide what it can or can not purchase.

Just the opposite of price fixing by clueless beaurocrats.

[Pranav]

Gold standard is tantamount to distorting the entire monetary policy so as to fix price of gold.

[Sanjay M]

No, gold becomes a yardstick to measure other things, and not to fix those other things in place

[Pranav]

No, gold becomes a yardstick to measure other things, and not to fix those other things in place

It is gold that is getting fixed in place, irrespective of what people are earning for their labour, and of what is happening to the prices of goods and services that people consume.

[shyam]

How do you fix gold when you can not produce that? All you can do is to hoard and that will work for some time. But to get anything useful out of that gold, they will have to part with that hoarding, and then it comes back to square one. Difference with fiat currency is that the latter can be printed abundantly.

[Pranav]

How do you fix gold you can not produce that? All you can do is to hoard and that will work for some time. But to get anything useful out of that gold, they will have to part with that hoarding, then it comes back to square one. Difference with fiat currency is that the latter can be printed abundantly.

If you have large stockpiles of gold, and if the currency is tied to gold, you can go on increasing your stranglehold over the economy, by causing monetary fluctuations or boom-bust cycles.

[shyam]

Boom/bust is made by supplying huge amount of money/credit into the market. How can you do that with gold? All you can do is to increase relative price of gold by removing some from the market.

[Pranav]

Boom/bust is made by supplying huge amount of money/credit into the market. How can you do that with gold? All you can do is to increase relative price of gold by removing some from the market.

You can increase money supply by making gold reserves available, which would be the basis for paper money which can be supplied as credit.

You can cause a contraction by withdrawing the reserves - i.e. not re-lending when the loans are repaid.

You can go on increasing your stranglehold over the economy essentially by selling high and buying low, not hard to do when you are causing the highs and lows in the first place. Your effectiveness can be multiplied by using futures contracts.

There is nothing special about gold - the same danger would exist when the currency is tied to any other monopolizable commodity.

[shyam]

I can see a flaw in the above argument. Once they release the money into the market, they can no longer withdraw as they like. When gold is removed from reserves, the exchange rate of gold/money must be adjusted according to the total money in circulation. Once they do that that is no longer gold standard, but plain fiat money. Secondly, they can not allocate unlimited gold into reserves. You know that Fed stopped publishing M3 data as it started going beyond any acceptable levels.

[Carl_T]

You can withdraw money by selling bonds.

[Pranav]

I can see a flaw in the above argument. Once they release the money into the market, they can no longer withdraw as they like. When gold is removed from reserves, the exchange rate of gold/money must be adjusted according to the total money in circulation. Once they do that that is no longer gold standard, but plain fiat money. Secondly, they can not allocate unlimited gold into reserves. You know that Fed stopped publishing M3 data as it started going beyond any acceptable levels.

Withdrawal of money is achieved by not making any fresh loans - so repayments of existing loans will cause a contraction in the money in circulation. (Selling bonds, as Carl_T mentioned, is another route.) Once you withdraw enough money from circulation to create deflationary expectations, a spiral is likely to ensue. Rumor-mongering through controlled media outlets is another tactic. With a fiat currency one could stop this, but on a gold standard one is helpless.

Also, under gold standard the price of gold remains fixed. It is the real value of the currency (i.e. prices of real assets and services) that fluctuates. That is what facilitates the "selling high and buying low".

[Pranav]

Interest rate targeting is misguided. IMHO one should concentrate on the monetary base aka M0, which is the actual amount of cash (whether electronic or printed notes) in circulation. Interest rate is not an independent variable.

Also, with the system being essentially on auto-pilot, fellows like Greenspan would be rendered redundant.

huh???

interest rate is the tool which the FED uses to control the monetary base.

interest rate is not the only variable, but is one of the independent variables influencing money supply.

What the Fed does have direct control over is the monetary base - because no dollar can exist unless it has been created and issued by the Fed.

Now, if you are doing interest rate targeting, you can lower interest rates by expanding the monetary base and increasing credit, but that is a temporary effect. Ultimately, the market will force interest rates higher because of inflation expectations (lenders will demand a real rate of return over the rate of inflation).

[Najunamar]

"What the Fed does have direct control over is the monetary base - because no dollar can exist unless it has been created and issued by the Fed."

Not true technically. Treasury issues notes and coins in circulation, the Fed does influence M2 and beyond using the lever of interest rates (a.k.a monetary policy) as mentioned. It would be interesting to consider spillover effects of fiscal policy (tinges of impossible trinity type considerations) using some of the modern simulation tools that can account for dynamic complexity.

[Pranav]

"What the Fed does have direct control over is the monetary base - because no dollar can exist unless it has been created and issued by the Fed."

Not true technically. Treasury issues notes and coins in circulation, the Fed does influence M2 and beyond using the lever of interest rates (a.k.a monetary policy) as mentioned. It would be interesting to consider spillover effects of fiscal policy (tinges of impossible trinity type considerations) using some of the modern simulation tools that can account for dynamic complexity.

US Treasury issues coins, but not notes - on the dollar bill it says "Federal Reserve Note". And electronic dollars are also created by the Fed.

Interest rates are dependent variables that are targeted, but not directly controlled, IMHO - the lever is control of the money supply through open market operations.

[ramana]

The Week Op-Ed:

Elephant becomes a Tiger

Good news: Elephant becomes a tiger - By Sushma Ramachandran

For a change, its good news. The Indian economy is making waves. It seems to be growing fast and that too consistently for several years in a row. What the economists call, "a sustained high growth path". The latest official data says overall economic growth touched 9.4 per cent in 2006-7, giving the UPA government a nine per cent average during its three year tenure. There is, however, a dark lining to the silver cloud. Agriculture is lagging behind the rest of the country with a low 2.7 per cent growth rate, showing that the aim of inclusive growth has yet to be achieved.

The bulk of the country's people are living and working in rural areas and the slump in the farm sector is therefore worrying. It seems as if the growth is lopsided, at least for the time being. The manufacturing sector of industry is growing at a rapid 12.3 per cent while services like IT, telecom and tourism are rushing ahead at 13 per cent. In other words, industry and services which operate mainly in urban areas are growing quickly but rural areas where agriculture is the mainstay are staying behind in another century.

At the same time, there is a lot to cheer about in this news. Firstly, it shows that sustained high growth is possible for this country like the tiger economies or China. India no longer has to continue being compared to an elephant lumbering along slowly. Even if the high growth is uneven for the time being, this defect can surely be made up if concerted efforts are made by policy makers. Secondly, consistent high growth does have some amount of trickle down effect even though this may be a slow process. Which does not mean we have to wait for affluence to trickle down to the poorest of the poor. Anti-poverty programmes have an important role in this country. But it does mean that high growth will have a positive impact on large sections of the populace even in rural areas.

For instance, despite all the hoopla over the negative effects of large retailers on small traders in the country, they seem to be helping farmers in some regions.. Reports have come in about Jharkhand farmers finally getting a good price for their produce as large retailers are buying directly from them and bypassing the middlemen. Till recently, middlemen would buy at low rates from the farmers and sell at exorbitant prices in the retail markets. Farmers never got the benefit even when vegetable prices were ruling high. Now that cultivators are finally getting their due, politicians are taking up cudgels for the middlemen.

Similarly, there has been a hue and cry about large retailers buying up foodgrains from the producing areas. Here again, the battle is between the middlemen and consumers who are worried about rising prices, but the farmer is reaping the harvest of better rates. Few people realize that food subsidy given by the government is actually meant to benefit consumers and not farmers. It is aimed at providing cheap foodgrains through the public distribution system. The problem is that the PDS does not function efficiently and many of the poorest of the poor are migrant labour who cannot use ration cards because they have to travel far and wide to earn their living.

So high growth which is driving the growth of large retail chains is likely to ultimately benefit the farmer and, hopefully, give a push to agricultural growth. Which does not diminish the role of both the central and state governments who will have to take steps to improve the farm scenario. Besides, the good news about overall high growth has to be tempered with reports of farmers' suicides continuing in several parts of the country. Much media space has been devoted to this issue and it is clearly time for this to be tackled as a national emergency so that no farmer ever needs to resort to suicide ever again in this country.

As I said earlier, high growth is welcome , but it seems to be somewhat lopsided till now. One can only hope that Prime Minister Dr. Manmohan Singh who steered the country towards this level, pulls another rabbit out of his hat, to finally make it a more inclusive and balanced growth.

[astal]

Interest rates are dependent variables that are targeted, but not directly controlled, IMHO - the lever is control of the money supply through open market operations.

True. The FED via meetings of its Fed Open Market Committee decides upon a target interest rate. It then instructs its traders to buy or sell money in the open market in order to achieve the desired rate.

http://www.amazon.com/Macroeconomics-N- ... 0716752379

Is a good introductory macroeconomics book for those interested. You don't need the latest edition.

[svinayak]

DHS and military preparing to engage the AMERICAN PEOPLE - relocation because of GULF SPILL??!!!!
http://www.youtube.com/watch?v=nejyLyZhMvM


They may try a large event if a major collapse of the US economy in the next few mths


unsubstantiated reports
http://www.youtube.com/watch?v=V5E4kBGcc54

[Sanjay M]

Bernanke Puzzled by Gold Rally

[Sanjay M]

Btw, making sure that prices don't change (0% inflation) is price fixing, but making sure that prices change by only 1% (1% inflation target) is also price fixing. Whether you fix the price change at 0% or 1%, you are still intentionally fixing it through a deliberate policy.