It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
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John Quiggin 
continuing the ‘ideology that sees itself in the mirror and doesnt recognise itself’ theme …
From the Lancet
During the early-1990s, adult mortality rates rose in most post-communist European countries. Substantial differences across countries and over time remain unexplained. Although previous studies have suggested that the pace of economic transition was a key driver of increased mortality rates, to our knowledge no study has empirically assessed the role of specific components of transition policies. We investigated whether mass privatisation can account for differences in adult mortality rates in such countries.
http://www.thelancet.com/journals/lancet/article/PIIS0140-6736(09)60005-2/fulltext#article_upsell
I suppose if you think the GFC is going to decimate our economy without masses of public sector spending and if you are built in the Keynesian mould then the following news is merely confirmation that the government is doing a good job.
http://news.smh.com.au/breaking-news-national/government-facing-300b-debt-blowout-20090424-agys.html
For the rest of us it’s a noose we would rather not have.
Perhaps you would prefer to have people half starving and rioting in the streets? That would be the outcome of allowing a great depression style crash without any government intervention.
Ultimately, sovereign debt is a lot of piffle. It can be repudiated if the results of repudiation are less heavy than repayment. People are real. Money is abstract.
This recession will show that Keyesian stimuli will have a smaller effect than the political rhetoric.
The argument that the stimuli will prevent mass riots and people going without food is a laugh. You do realise that FDR had stimuli plans when he was in government the great depression persisted.
If you default on your debt, the future borrowing is going to be hideously higher. South American countries default on their debt all the time. Do you want us to be like Argentina?
What a load of nonsense is talked about sovereign debt. When you have a loan then there is someone who is a borrower and someone who is a lender. If they are in the same “sovereign” then it does not matter to the sovereign. Loans are about ownership not about economics. If our loans are owned by Australians it is about the distribution of ownership.
What annoys me is that governments are borrowing money from the financial system yet the financial system we are told does not have money to lend. So the government allows the financial system to increase the money supply then borrows its own money!
Clearly this is lunacy – the government should simply increase the money supply and give it to the people to invest. We can find all sorts of rationalisations about why it is best to create money by giving loans of money we do not have, but the fact is that this approach advantages those in society who already control assets and they are the squeakiest of wheels. This is the main reason why we use this archaic, convoluted mechanism. It is not about the most efficient way to get the best value from the new money printed but it is about who gets to own it.
To see another way of increasing the money supply and at the same time fund the National Broadband Network visit http://stableproductivemoney.wordpress.com/2009/04/13/shares-as-special-money-to-build-the-national-broadbank-network/
In the long run the only difference between what is proposed here and what is proposed by funding through borrowing is who ends up owning the Broadband Asset. Will it be a relatively few private individuals or will it be the mass of the people.
I wonder if the great defenders of the current bizarre way of increasing the money supply have thought through its implications.
smiths
It is not that the pace of transition causes mortality rates to increase. This is an “emergent” property of the WAY the transition is achieved. The way economics seems to be applied is to look for these sorts of relationships and then to base policies around them instead of looking at the underlying mechanisms on how and why the changes occur.
This is a classic case. It is not the pace of transition that will be problem it is the way the transition is being achieved. The simplistic view will be that pace is related to mortality hence we need to lower the pace. No, the reason that mortality will have increased is that people can now do more dangerous things that they couldn’t before – like eat french fries.
Finding that there is a relationship is fine but do not now go looking for policy options in the area of “pace”.
I find this approach most annoying with policies that are based on this sort of evidence. For example people go around looking for relationships between minimum wages and unemployment and if they find one or even if they do not find a relationship they say we need to cut minimum wages so the unemployment will decrease. Minimum wages are not about unemployment. Minimum wages are best expressed in the judgment of the “The Harvester Case”. If it turns out there is a problem with unemployment then we fix that in a different way – we do not fix it by dropping the minimum wage.
Economics as it is currently practiced needs to change its emphasis and not look for so called “economic” solutions to all issues.
Kevin – you can increase the ‘medium of exchange’ any number of ways. However you still need to manage the ‘unit of account’.
I’d be keen to know what John Quiggin and others think about the idea of a new global reserve currency based on SDRs or some such thing.
http://www.abc.net.au/news/stories/2009/03/26/2526610.htm
TerjeP
Money is an abstraction. Two properties of money are its value and the second is its ownership. The medium of exchange is irrelevant in the sense that it does not matter whether it is gold, US$ or A$ or electronic markers. It is the meaning given to the symbols that matter.
The meaning we give to the symbol is that we are willing to exchange the symbol (money) for goods and services. The meaning of the symbol becomes devalued if we have too many symbols in existence. It is important for the symbols to retain value as units of account and this is done by restricting the number of symbols in existence.
To restrict the number of symbols you need a mechanism for controlling their creation and removal.
The controller of the symbols (in our case the Reserve Bank) is the organisation charged with creating and destroying symbols and charged with who gets to own the new symbols.
They have abrogated their responsibility with respect to issuing new money because they have given most of this task to the banks who are meant to create new money wisely through loans and to destroy the money when the loans get repaid. That is the banks decide who gets to own the newly printed symbols.
The Reserve Bank tries to control the number of symbols by the fractional reserve kept by banks that sits somewhere not being lent and by changing the interest rate it charges when it lends money.
This is a very convoluted way to increase and control the money supply. It makes some sense because it uses the same mechanism as is used to lend existing money but it makes little sense as a controllable mechanism to increase the supply and destruction of money. The reason it makes little sense is that it is “easy” to change the ownership of money and with it resources simply through money markets rather than getting ownership of money through productive endeavours like increasing the range of goods and services to purchase.
It is no wonder we are in a mess when the finance sector we are told accounts for 25% of our GDP. Those whose task it is to control the money and distribute it to the rest of society cost us 25% of our total income and wealth. This is absurd for what is after all only a book keeping exercise that can be pretty well automated. It should be a maximum of 0.5%.
The system can however be changed easily and simply with little disruption by those in charge of our currency if they take back control of how to both increase and decrease the symbols of wealth.
I am proposing a method of increasing the money supply by ensuring that the money – before it is created – is backed by a tangible productive asset. If too much money is created then it should be destroyed in a similar way to the way we destroy bank notes. The government collects it through tax and does not use it again thereby destroying it.
This is easy to do and I predict it will get rid of the business cycle, give us stable sustainable growth, reduce the cost of the finance sector to a fraction of its current cost, give zero inflation and finally if that were not enough, give us a mechanism to direct expenditure to needed public goods through a market place.
If my claims are half right this is pretty important.
Your comment about the medium of exchange versus the unit of account comes because we think about the problem in different ways. I think the medium of exchange is irrelevant . What is important is how we control the number of “units of account” not the particular units of measurement. That is, I do not care if we measure distance in kms or miles or money in gold or SDRs – but I do care how many “miles” of value are in existence.
So finally to your question on SDRs it does not matter if we use SDRs or US$ or A$ or kwhs or gold as long as the controller of the currency takes charge of creating and destroying units of account in a sensible and rational way.
The recession is going to raise new questions about the role of Government and markets in the economy.
The social-democratic perspective sees this as an opportunity for Government to take a more active role in the economy. However, this point ignores the failure of Keynesian stimuli announced around the world and the fact that Government already has an active role in economic management.
The economic liberals are genuinely silent except for the Austrian school economists who view the recession as an opportunity to dismantle the concept of central banking.
A new debate will have to emerge from the crisis. The financial system suffered from systemic risks that were not apparent to most observers. Banks became both too big to fail and too big to bail. The Government’s regulations have not worked as intended with at times significant negative effects on the general economy (think Fannie and Freddie in the US).
Looking at a macro scale, only with this recession is the savings ratio in the western world increasing. The savings glut in Asia and the Mid East caused risk premiums to be ignored in the fixed income and equity markets. Increasing amounts of money were chasing financial products – leading to an explosion of new and complex financial instruments that ultimately could not be unwound in a bad economic environment.
How can we create a new paradigm that takes into account a move towards higher savings in the western world in addition to the savings in Asia and the Mid East? What is the role of the financial system post-recession?
I found an interesting discussion on official statistics vs reality for US infaltion at this site:
http://www.nowandfutures.com/cpi_lie.html
The obvious question is – are we in the same boat? I remmeber all sorts of maneuvers to put in/take out mortgage repayments nad rental costs in the CPI basket over the years.
Does anyone know? Was real inflation here much higher than CPI in the past few years?