Thursday, February 18, 2010

Just What I Needed

Anonyman writes that the CORRECT answer for investment, and monetary policy, in my Fox Business fiasco, would have been something like this. So, let me address the gold / silver / fiat money question.

I have just never understood why there is so much concern over currency, as if this were the number one problem. No question that a fiat money does in fact give the government enormous power. But the currency is more a reflection of power the state already has, rather than a cause of it. Three short points:

1. If the currency is "backed," or convertible, then the government has to store a gigantic amount of physical bullion as a reserve. But then the government can easily devalue the currency by changing the official, as opposed to black market, exchange rate of dollars for gold. There is no protection there, none. And you can't fix the exchange rate, because the value of gold as a commodity and investment in its own right fluctuates, a lot. That means the actual value of dollars would fluctuate with a commodity. That's not stability, that's giving government more power than it had before.

2. If the currency is actually made up of a certain amount of gold or silver alloy, then again its value would fluctuate with the price of the commodity. Worse, it would be heavy, inconvenient, and would wear out over time, wasting tons of gold each year rubbed off on the inside pockets of consumers. How would credit cards work? Very little of our money is currency. You can't possibly have real metal money, because that would (again) be more of a restriction on liberty than the current system.

3. We could get rid of fiat money altogether. Just private money. But the transactions costs of doing that, worrying about inflation and fluctuating exchange rates between different private currencies, would be enormous.

Here's the thing: the government doesn't control the money supply NOW. If you have a credit card, or several, you can create large amounts of new money, all by yourself. Anytime you secure a new line of credit, and actually spend it.... there goes the money supply. And if the government buys bonds, in "open market operations," that doesn't mean that banks will lend. The velocity of money is endogenous, as we have seen recently as credit dried up and people (and banks) held much larger cash balances in the forms of savings and reserves.

Again, I'm not denying that a fiat money creates enormous power for the state. Of course it does. But the war on drugs, the war in Iraq, the Patriot Act, restrictions on the right to marry, restrictions on hiring, regulations and taxes on small business, involuntary annexation....I could go on. Why would you start with money, as the number one problem?

And if you DO think that money is the problem, why not work on fractional reserve banking, derivatives, restrictions on competition in insurance, and so on? The obsession with the currency.... I don't get it.


Anonymous said...

Here's Hayeks take (some of it) on competing money -

Love your blog/podcasts, the middlemen and opportunity cost audio blogs at econtalk were real eye openers.



Mr. Overwater said...

I've often wondered about this too. Let us know what you find out about why some people obsess about currency.

Unknown said...

first, I'd argue that the volatility of gold has little to do with its commodity value, but rather because it's viewed as a safe haven against a devalued fiat currency. So it fluctuates largely as a corollary of expectations of currency fluctuations. (Friedman and others argued that moving completely to a fiat currency would drive gold down to its commodity value which I believe was around $5/ounce. Instead the price of gold skyrocketed)
Second, does government not have the power speed up the "velocity" of money? Right now, those large excess reserves in banks are earning 1% interest; banks would rather earn this measly amount than risk the uncertainty of lending on the market. If government wanted banks to lend, could they not simply tax excess reserves? a policy that has been resorted to in the past.
-Those abuses of power listed at the end are largely funded through the ability to devalue money at will. And fractional reserve banking and the currency situation seems essentially tautological. But alas, it may be the more realistic ambition to deal with the symptoms first before attacking the virus head on.
-BTW, I notice the Afghan war was conspicuously absent from the list of injustices at the end. I'd be interested to here your take on that; perhaps for another blog.

gabriel said...

the thing i don't get about gold bugs is they never seem to have read any history (e.g., Gibbon), if they did they'd see that inflation is just as possible with specie as with fiat currency, it's just with specie we call it "debasing the coinage" instead of "printing money" or "quantitative easing."

Anonymous said...

a credit card you can create large amounts of new money, all by yourself. Anytime you secure a new line of credit, and actually spend it.... but you have to pay your bills on time to improve your credit report score
I saw this free credit repair
and now I am free from debts i can use my credit cards most specially incase of emergencies.

Gennie Chan

T.Lord said...

This is one of the few times that (what I take to be) a spam comment -- the one about "free credit repair" above -- is actually funny and on-topic ;)

Now you'll spawn all kinds of money creation *and* improved credit!

T. Lord