Tag: gold standard

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Economics Humor

[2656] Chinese New Year to cause a recession in Kuala Lumpur

With Chinese New Year being just around the corner, many are expected to leave Kuala Lumpur behind to visit families and relatives who live outside of the city for a week or so. Many of those living or working in the city have left the city.

With the Chinese forming more than 40% of the population of Kuala Lumpur, and possibly with others who may just take the opportunity to travel out, the city is poised to suffer from a massive demand and supply shocks. Without any intervention from the relevant authority, the economy of Kuala Lumpur is expected to go into recession this week and the next.

Keynesian economists are already in panic mode and they are pushing the City Hall to expand government expenditure to combat the expected sudden output loss. The City Hall has indicated that it is prepared to spend more on mobile toilets. In a surprising turnaround, the City Hall has invited Bersih to hold a big clean election rally to boost demand for security and sanitation services.

As a concession to the supply-side economists, the City Hall is incorporating tax cuts within the city. The authority is also prepared to increase immigration quotas to combat the supply shock. Indeed, the City Hall is in close contact with Sabah state government to import excess labor that is prevalent in the state to the east.

The demand and supply shocks are expected to bring about deflation even as unemployment rate remains low. There is a labor shortage in fact.

While the monetarists are silent on the supply side of the problem, they are advocating the central bank to reduce the policy rate as quickly as possible. To avoid complication that arises when the rate reaches the zero lower bound, a group of monetarists calling themselves market monetarists are demanding the central bank to guarantee certain nominal gross domestic product growth. The central bank appears reluctant to set such an explicit target but in a recent press conference, the governor has hinted that the bank is prepared to minimize fluctuation in the aggregate demand.

Amid the calls for government action, there are groups which are vehemently against any stimulus. The real business cycle economists, educated at various freshwater schools, insist that there is nothing the government and the central bank can do. “The economy will be at its optimal path. In fact, the economy has always been at its optimal path. Any attempt by the government will cause the economy to deviate away from its stable state. And after all, a majority of people are going on a holiday. I fail to see why that is even a problem,” said an economist at a domestic bank. He refused to be named in fear of backlash from the establishment which might not take diverging views too kindly.

Meanwhile, Austrians criticize the manipulation of monetary policy and assert that it will cause future recession. “The only real way to prevent future recession is to prevent the central bank from playing with the rates. We should back money with gold and other precious metals,” said an Austrian economist seen holding F.A. Hayek’s The Road to Serfdom. Another proponent of gold standard coming from Islamic school of thought agreed. “Besides, it is haraam that we make money out of money. A gold standard will kill off a system of interest rate by reducing the possibility of inflation.”

A Marxist was quick to add, ”Capitalism is corrupt. This coming recession will see the collapse of capitalism. I have been saying this since 1990s. Some have been saying this since 1930s. Since 1867, in fact. You just wait and see.”

Economists from major schools of economics were seen rolling their eyes. “There are reasons why Marxist, Austrian and Islamic economics are heterodox economics. They’re nuts. We lived through the 1930s but these people are stuck in the past. These people have no idea what they are talking about.”

Private economists expect the domestic economy to recover completely by March as Kuala Lumpur experiences reversed migration flow after Chinese New Year end.

Economists however warned Kuala Lumpur may suffer from another recession in August, when Muslims in the city will celebrate the end of Ramadan. “There are just too many holidays in Malaysia. The government should really stop introducing new holidays every year. The government should stop interfering with the holiday market. It’s recessionary, every time,” said the freshwater economist. He suggested that we do away with holidays. ”But I don’t think it will ever happen. At least not before the election. Everybody loves holidays. Any politician who dares to take away those holidays will lose his or her seat.”

Categories
Economics Society

[2632] The worthlessness and the vestige of gold

In the olden days when four-legged beasts were the best mode of land transportation, gold was money. Everyday transactions involved gold and other precious metals as the medium of exchange then, just as paper money now dominates transactions in the modern economy. Gold had a very special position in human culture then due to its fundamental functions. It is still special today, but only because of vestigial reasons.

During the European Age of Exploration, Portuguese and Spanish explorers crossed the seas under the guises of God, Gold and Glory. The truth is that it was never really about god and religion. It was about the gold more than anything else. When Hernán Cortés and Francisco Pizarro first set for the heart of Aztec and Inca separately, they were dreaming of the glittering yellow metal for themselves.

As other European powers rose to take their place in history, the search for gold became less explicit. The new explorers, traders and later colonialists did not go out in search of El Dorado but it was still about amassing wealth through commerce. It was less explicitly about gold but yet, wealth was very much denominated in gold still.

Sometime during the industrial era, gold and other precious metals lost their function as the medium of exchange. They were no longer circulated as widely as they were during pre-industrial period. It was all papers and coins by the time motorcars, trains and steamboats were crisscrossing the world. By the 20th century, the dominance of papers was almost absolute.

Nevertheless, all money was still backed by gold and other precious metals.  Papers and coins struck out of cheaper materials were merely claims to those precious metals. All issuers promised to convert those papers and coins to gold upon demand. So, gold may have lost its role as a medium of exchange during industrial times but it was still the ultimate arbiter of the value of money.

That last real function of gold ended in the 1970s. The United States government ended the direct convertibility of the US dollar to gold as a reaction to an economic crisis. Soon after, the world followed in ditching the convertibility and thus, gold stopped being special.

Many continued to believe that money, even in Malaysia, is backed by gold but the truth is that all economies in the world today run on fiat currency. That is, money today has value only because its issuers say so and the market believes the words of the issuers.

To put it in clearer terms, gold has no importance to modern central banking.

Of value instead to the modern central banking system — and the wider economic system — as far as money is concerned is trust. Indeed, at the heart of capitalism, is trust but not gold. Capitalism can survive without gold—it is running affirmatively better without gold—but it cannot survive without trust.

So, gold has no fundamental economic function to play anymore in our modern world. Gold is neither a medium of exchange nor does it back any money. Because of this, gold really does not deserve the reputation it enjoys now.

The reputation of gold lives on only because of humanity’s vestigial attitude towards gold.

The phenomenon is much like in the case of Pavlov’s dog. The dog learned that a ringing bell meant food. The dog then began salivating at the sound of the ringing bell instead of at the food per se. It did so even when food was not present. At the end of the day, the dog had been conditioned to salivate to something else entirely. In some ways, the dog had been tricked.

In the same way the dog had been conditioned, humanity has been conditioned to think favorably of gold. Gold has seeped into our consciousness regardless of the fact that gold now has no fundamental economic function anymore. So persistent in fact the favorable predisposition towards gold that too many laypersons still believe that money today is backed by gold, despite the abolition of such a system more than four decades ago.

The momentum of history is huge and it takes time for humanity as a whole to adapt to the new reality of fiat currency.

The failure to adapt can exert cost especially on the gullible. The case of Genneva is one example where individuals were cheated out of their vestigial sentiment for gold.

Believing that gold had a special place in the modern world, they too eagerly bought the metal from Genneva while not realizing that they were being manipulated. It is only too bad that reality had to set in and the scam had to end. Actions by the authority in both Malaysia and Singapore only hastened the inevitable collapse of Genneva, just as any large-scale scam eventually will under of its own weight.

Of course, financial scams come in so many other ways and gold is not an exclusive tool for scams. Old-styled Ponzi scheme relies on just money, plain old greed and some doses of gullibility. Still, the obsession with gold is unhealthy. The sooner we all realize that there is nothing special about gold anymore, better we all will be.

After the learning is complete then perhaps we may start to put our money into something more productive than the vestige of gold.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on November 23 2012.

Categories
Economics Politics & government

[2587] You shall not crucify mankind upon a cross of gold

I do not take hard currency idea seriously. Hard currency is a wacky idea. I generally think supporters of hard currency, gold standard advocates being the worst, as non-serious discussants of monetary policy. Hard currency is inflexible and it will exert unnecessary pain in time of crisis. If we had a hard currency all over the world during the last financial crisis, we would have easily experienced the worst depression in modern times. Worse than the 1930s Great Depression.

It would be worse because the world’s economy was so much bigger in the 2000s than it was in the 1930s and given real prices of commodities associated with hard currency, gold and silver specifically, the supply of hard currency could not accommodate the demand for money. The world’s economy would be much smaller than it was at every single point of modern history even without any crisis.

I am a libertarian but unlike too many libertarians, I prefer fiat money to gold standard. I have rationalized my position before.

On top of that, I am a monetarist because I understand the basic operations of modern monetary policy and its implications. I accept the lesson taught by Milton Friedman and Anna Schwartz: in times of crisis, expand the money supply. Under hard currency, the expansion is almost impossible while deflation, which as damaging to general welfare as hyperinflation is, is always a real threat.

Although I am generally reluctant to admit it, I do ultimately support previous quantitative easing exercises in the United States and other similar money supply expansion in other parts of the world. The fear of expansion is always about high rate of inflation but it is quite clear for the past few years that there is a considerable unmet demand for money that money supply expansion does not create any kind of noticeable damaging inflation. Until inflation becomes a credible threat, I will not oppose money supply expansion by too much.

In other words, I think Federal Reserve chairman Ben Bernanke has done a great job. Bernanke given his scholarship is the right man for the job.

So, I take it as a demerit when Mitt Romney said he would not reappoint Bernanke to the job if he is elected as the next President of the United States. And I take it as a huge downer for the Republicans to bow to unreasonable crowd that is the Tea Party and then push for gold standard.

This may force me to reassess my bias with respect to US politics.

I have a Republican bias just because of Republicans’ economic policy has typically been closer to my preference (notwithstanding the Clinton’s years that blurred the line; I do consider Clinton as the best President in recent times). At least, the rhetoric is. And I do think the selection of Ryan Paul as exciting. This election has catapulted libertarian understanding to the national front farther than Ron Paul has ever done.

But the contemporary Republican view on monetary policy might be too much for me.

There are many great economists within the Republican camp at the moment. It is the responsibility of these economists to advise the Republicans of the folly of gold standard.

Categories
Economics

[2316] Of would goldbugs support a large diverse monetary union?

I took a long hard look at a one-euro coin in my hand while I was on a train to Versailles from Paris. For a huge monetary policy controversy across the Eurozone, the coin does not look so special. It is a small unassuming bimetal. Not too many would take a second look at it. Everybody here in France uses it for mundane purposes. Yet, its link to Eurozone’s policy is there and is no small matter.

I was focusing on the coin to avoid thinking of somebody that I care a lot about. After awhile, I began to retrace the cause of the controversy with Eurozone and the weaknesses of monetary union in general. A question soon popped in my mind. Would some hard currency advocates — goldbugs and others — support a large monetary union?

A typical weakness of a large monetary union is its inflexible interest rate as set by its central bank.

A large area with diverse parts that economically grow or shrink differently. That demands different monetary policies and specifically, different interest rates to be pursued by different parts of the union. A monetary union prevents these different parts from pursuing individual rate however. There is only one rate by definition.

The politics between members of the union will inevitably decide the union’s single rate. Each representative at the table will promote the interest of the member who they represent.

The more diverse the members of the union, the harder it will be to achieve a consensus. It is hard because the rate cannot accommodate everybody easily, if ever.

The debilitating politics of a diverse monetary union discourages the rate from becoming flexible. It would be hard to change the interest rate at any one time, unless there is to be some kind of systemic shock that would make everybody to agree to some magnitude of rate change on top of individual needs, and unless the composition of the decision-making body is skewed to side that makes the body unrepresentative.

Through this, the central bank effectively loses control of the rate. This, I think, is a close equivalent of having a hard currency because the central bank loses its power to print money arbitrarily.

Given this, I think many advocates of hard currency will likely like the creation of a large and diverse monetary union. Or at least, they would prefer this to a normal fiat currency regime.

Categories
Economics

[2237] Of why I prefer fiat currency to commodity-backed currency

Libertarians generally are in favor of commodity-backed currency. This is largely based on typical libertarian attitude towards the state: do not trust them.

Others who are not quite libertarian share the same idea about trust. They really have trouble believing that a piece of paper worth something when it is only backed by some promise. They rather have a piece of paper that essentially put a claim on some asset. Typically, that asset is gold although it does not have to be gold.

A step beyond the issue of trust is the fear of inflation and the belief that commodity-backed currency is not inflationary. It is a myth that commodity-backed currency is not inflationary however. Theoretically, gold supply can increase to affect the quantity of money in the economy directly and thus, creating an inflationary environment. Admittedly, there is more inflationary risk associated with fiat currency than to commodity-backed currency.

Before we go farther down the road, let me clarify one thing: I do not think highly of commodity-backed currency when it is juxtaposed with fiat currency.

As a libertarian, I need to rationalize my position through libertarian means, especially so when I am going against the libertarian stream. This entry is partly where I do that rationalization.

I would like to address the worry of inflation first because it is more general than specific libertarian concern. I will visit the libertarian concern soon after.

The inflationary concern has been overblown by proponents of commodity-backed currency, and especially by supporters of gold standard. Despite the ”˜distrust-the-government’ mantra, modern monetary institutions these days are good at managing inflation. The occurrence of hyperinflation, which is really the problem, is rare. As long as those institutions are independent under normal everyday circumstances, inflation can be contained, or at least inflation attributable to changes in money supply. Note that not all inflation is due to increase in money supply.

On the issue of libertarian distrust of government, that does not really automatically translate into support for commodity-backed currency or more specifically, for gold standard. Private banks, for instance, can issue fiat currency. The only prerequisite to fiat currency is trust, no matter who the issuer is.

But what about trust in general, be the issuer is the government or some private entities? I would like to argue the use of commodity-currency is a society that suffers from trust deficit. I will save that for another day.

Finally, the practical reasons for fiat currency vis-à-vis commodity-backed one are unrivaled. One of those major reasons is flexibility: I value the flexibility that comes with fiat currency, which commodity-backed currency does not have. The flexibility is this: fiat currency can completely mimic commodity-backed ones while the reverse is untrue.

Flexibility is especially valuable in times of economic crisis. Perhaps, once I find myself in an economic foxhole, I tend to waver on the idea of limited government. But I would like to think that the flexibility of monetary policy allows the use of monetary policy as the first course of action when the other option is fiscal policy. I think this is a practical libertarian justification to the use of fiat currency.

Fiscal policy is more damaging to the idea of laissez-faire than monetary policy. Fiscal policy tend to have real programs associated with it while monetary policy is just, well, about money. Programs associated with fiscal policy often involve active government intervention in multiple fields. Meanwhile, the management of money involves only passive intervention. Between the two evils, I would vote for monetary policy. I am voting for monetary policy.

But that choice is available only when there is flexibility in the monetary policy. Without flexibility, the urge to engage on large fiscal policy can be too great to resist in time of crisis.

People do not like pain. In a democracy, doing nothing may not be viable. The democratic reality is that there is a populist element needs to be tended to, however unfortunate that is. With monetary policy, at least there is an avenue to do something and reduce the pressure for heavy government intervention.

Of course, both policies are not mutually exclusive but with monetary policy, the size of fiscal policy can be managed, compared to a scenario where there is limited monetary policy spectrum to choose from, i.e. when there is only commodity money.