Dark Matter

Over the fold, my column in today’s Fin, which deals with the latest “don’t worry, be happy” theory on the US (but not Australian) current account deficit.

A dark matter of deficits

AFR 22/12

Given the unwillingness of the Bush Administration to offer any policy response to the massive growth in US budget and current account deficits, it is not surprising to observe a steady stream of theories explaining that such deficits can be sustained indefinitely.

The latest put forward by Ricardo Hausmann and Fredrico Sturzenegger of the Kennedy School of Government at Harvard, uses the catchy idea of ‘dark matter’, a reference to the unseen matter cosmologists believe is necessary to explain the observed properties of the universe.

Such hypothetical forms of matter have a patchy history. Successes include the prediction, by the Big Bang theory, of the cosmic microwave background radiation, discovered in 1963. In the eighteenth century, on the other hand, physicists posited the existence of a substance called phlogiston, with negative mass, suppose to be emitted in the process of combustion. In reality, substances gained mass during combustion because they combined with oxygen.

Another hypothetical substance was the luminiferous ether of the 19th century supposed to carry light waves. Einstein’s theory of relativity eliminated any need for the ether and the idea has been discarded.

Hausmann and Sturzenegger use the idea of dark matter in a couple of ways. The first (fairly uncontroversial) is to argue that while the official accounts show that the US is a large net debtor, the fact that the income account has shown a small surplus for most of the past two decades suggests that the value of US assets overseas is understated. The unmeasured excess is referred to as dark matter.

The second idea is to argue that, since the income balance has been roughly stable over the past five years, the massive trade deficits of that period must have been offset by steadily increasing exports of dark matter, totalling around $3 trillion. Hausmann and Sturzenegger suggest that this dark matter consists of such things as seignorage on US currency, the expertise embodied in operations like EuroDisney and the capacity of the US to provide implicit insurance services.

Something like this must be true if it is assumed that the willingness of foreign lenders to support the trade deficit is the rational outcome of efficient markets. In this sense, the ‘dark matter’ hypothesis is very like phlogiston. No-one would believe in its existence if it were not necessary to make the theory work.

In 1999, after all, the US economy was riding high. The dotcom mania was in full swing and a stream of books promised a golden future, with an unending boom and the Dow rising to 36 000. The US government had balanced its books and was projecting a surplus of $US5 trillion over the period to 2010.

Is it really plausible that the last five years, with the collapse of the dotcom boom, the emergence of chronic government budget deficits and weak employment growth have increased international faith in the US to the tune of $3 trillion, as claimed by Hausmann and Sturzenegger?

There have been some important positive developments in the US economy in this period, such as strong growth in output per hour. But this ought to have led to an inflow of equity capital. In fact, foreign investors have generally withdrawn equity capital from the US in this period.

There are some technical difficulties with the ‘dark matter’ analysis. A crucial analytical assumption is that assets should be valued according to the average value of the returns they generate. In fact, however, the riskiness of returns is equally important. The visible transactions in the national accounts show that the US has built up a large stock of short-term debt, which offers relatively low risk in the absence of an exchange rate collapse. By contrast, the putative dark matter is illiquid and almost certainly highly risky.

The real problem though is that Hausmann and Sturzenegger overlook the obvious explanation for the recent strength of the US income balance. For most of the period since 2000, US interest rates have been exceptionally low. Given the importance of short-term debt, this obviously improved the balance temporarily. As interest rates have risen, however, the income balance has turned negative, and this trend will accelerate as debt is rolled over.

One final point. If the sustainability of the US current account deficit is explained by ‘dark matter’ what does this say for Australia? It’s hard to believe that we share the supposedly unique capacity of the US for seignorage, insurance and so on. The ‘dark matter’ hypothesis actually makes Australia’s chronic deficits look less sustainable.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

103 thoughts on “Dark Matter

  1. well I certainly accept your unsoruced figures over those of the US Government.

    My source is the same as Terje’s, which is wiki, which in turn quotes the CIA and IMF, both of which check out.

    Keep digging Ian, you’ll reach China soon (literally and metaphorically, or at least you’ll reach Mao’s China).

  2. Dogz: I am sure the New Orleans citizens are about as impressed with the state of US infrastraucture as the citizens of Redfern are with the state of Australian infrastructure.

    Funny, I don’t remember reading about any levees collapsing in edfern.

  3. Extracts – US – $39495; France – $27737

    That’s a 30% difference – not 50. Hopefully dogz is mroe careful in his calculations at work.

    Indeed I am: $39495 = 1.424 * $27737. So on those figures a 42.4% difference, not 30%. Dig Ian, dig.

    Something else for the leftie stagnationists in the audience: Janet Albrechtson in today’s Australian – another ripper:
    http://www.theaustralian.news.com.au/common/story_page/0,5744,17672971%255E32522,00.html

    Excerpt:

    And just to confirm that opposition aimed at Howard is too often unshackled by reason or evidence, the Howard haters have finished off the year with one of their old favourite taunts: Howard, the racist ringleader. When, after the Cronulla riots in Sydney, he refused to label Australians as inherently racist, it was just another example of “all sorts of dark shadows fall[ing] out of his mouth”, according to Richard Ackland. Howard is holding the lead of that “rancid old race dog”. Or, according to left-wing think tanker Clive Hamilton, Howard was whistling at us racist dogs. And let’s not forget Barns’s contribution: we are living in a pigsty with the PM winking and nodding to a racist populace.

    Dark shadows? Leads and dogs? Pigs? Winks and nods? Howard’s critics imagine he has some spooky Svengali-like influence over that dumb animal farm known as the Australian electorate. But, then, Howard haters are forced to talk down to voters rather than ‘fess up to the fact the PM may be on to something with policies based on empowering individuals to make their own decisions, thus neutering a whole swag of elites who would prefer to call the shots. No wonder his critics are becoming more feral every day.

  4. Dogz Says:

    SJ, click on Europe in the world map at that link. Blue is slower growth, green is faster growth. Almost all the faster growth is in the new eastern-block countries.

    Oh my lord. So that’s your evidence that:

    People invest in the US because it is by far the most dynamic economy on earthz.

    Europe is sclerotic, the result of being run by academics and bureacrats who for the large part have never held a real job or created any wealth. Britain manages to distance itself from many of Europe’s problems, but still suffers from Eurpoean drag, and that perennial negative outlook of the “pommie whingers�.

    Do you realise that your proffered evidence shows both western Europe and the US “bottom” in the entire world?

    So what’s the story?

    Is there a problem with your assertion that “the US… is by far the most dynamic economy on earthz [sic]”? (Hint, yes there is)

    Is there a problem with your comparison between the US and western Europe? (Hint, yes there is)

    So tell me, why do you come here? It certainly isn’t to offer any wisdom or insight, and it’s doesn’t seem to be to learn.

  5. No SJ, that map was evidence in support of my asserion that most of the EU’s growth is coming from the new eastern-bloc additions. Go back and read the thread.

    If your economy is already extremely efficient, and you already have a GDP per capita 40%-50% above the EU, then it is unsurprising that you’re not going to grow that rapidly. You could use a similar argument for the lower growth in the old socialist Western European countries if they were at the top of the economic totem pole. But unfortunately they are not.

    So tell me, why do you come here? It certainly isn’t to offer any wisdom or insight, and it’s doesn’t seem to be to learn.

    I’m not hear to teach you anything SJ. It would be a waste of my time to try. You seem to have replaced reality with your idealized (but wrong) vision of humanity, and nothing I say or do will change that.

    But to answer your question: I come here primarily for sport.

  6. Ian Gould.

    Sorry, my mistake I thought you favoured a planned economy. It certainly read like that. Anyway it seems you have some sympathy for my position anyway

    I don’t get your other comments. Please explain.

    Thanks

  7. >Indeed I am: $39495 = 1.424 * $27737. So on those figures a 42.4% difference, not 30%. Dig Ian, dig.

    The IMF figures have alreay been adjusted to PPP so the relevant calculation is actually $27737/$39495 which equals 70.23%.

  8. Steve, my view is pretty simple.

    When I find myself in a forum where people are attacking the US and rubbishing the idea of free trade, I take the contrary position.

    When I find myself in a forum where I think someone is exaggerating the relative economic performance of the US and bashing the Europeans unfairly, I take the contrary position.

    As I’ve said pretty much ad nauseum on various threads on this blog, I believe in a mixed market where most decisions about the allocation of resources are made through individual businesses and individuals trading in markets.

    Unlike some other posters here though, I don’t assume markets are always and invariably correct and I believe there is a role for government to intervene in soem areas of the economy.

    As an example, I believe there’s a role for government in setting a minimum wage. I’ve noted previously somewhere here that there’s no a priori reason to assume that the market-clearing rate for labor (i.e. the wage rate that would produce full employment) is equal to much less higher than the absolute minimum required for survival.

  9. Ian Gould
    It’s only a small step for someone like you to reach the conclusion that I have reached in that in a post industrial age we don’t need free markets in anything. The reason to me is quite simple. If one believes like we do that workers are exploited and therefore ipso facto open labor markets don’t work in a post-industrial age why have a market at all in other areas of the economy? Who needs it?
    As you would understand there is an inconsistency in the mixed economy theory. Labor markets should not (ever ) be free so why should any other market?
    By the way you really gave it good to the RWDB. Keep up the great work. You inspire us.

  10. Hmmm – I think (or is that hope) that Steve chidio is Trolling – certainly reads that way.
    .
    Ian,
    Achieving high growth rates from a low base is not difficult. The path to reasonable success is already mapped out for you – you do not have the expense of taking blind alleys to deal with. The fact that France has not radically outperformed the US, coming from a lower base (whether 50% or 70%) even without the blind alley costs to me indicates that there is a problem.
    Most of the nations cited were, at one time or another, among the wealthiest on Earth – they were then, for a long time, outperformed by the US. To me at least the reason is simple – free trade and a respect (but not necessarily a reverence) for the market in the US. The periods of low growth in the US have always corresponded with high levels of protectionism and other government interference there. Whether this is cause or effect is debatable (I believe cause), but your position on free trade I believe mean that you largely agree with this.
    I would be interested to see your justification for a minimum wage, other than your bald statement; as, to me at least, even if the clearing rate is just above starvation (a conclusion I can find no evidence for) then at least the workers would be earning a wage, rather than none at all, while their skills degrade and dis-savings occur.

  11. I would prefer a government funded social wage instead of a minimum wage. If we are going to subsidise the unskilled then it is better that the subsidy is funded from a broad based tax rather than from the specific businesses involved.

    One of the problems with welfare as it exists is that people are penalised for trying to become independent of it. And minimum wages criminalise employers that might assist them.

    If we are to have a minimum wage then it should be set at a local government level to suit the conditions of particular economic regions. If an area has high unemployment then it should be free to lower its wage claim in order to attract capital (ie employers).

    I would propose that we lower the federal minimum wage from $12.30 to something like $7-$8 and then allow the regional areas to set a higher level if they see fit. I envisage that this would require enabling legislation at the state and/or federal government level.

  12. If we are to have a minimum wage then it should be set at a local government level to suit the conditions of particular economic regions. If an area has high unemployment then it should be free to lower its wage claim in order to attract capital (ie employers).

    Eek. I don’t know where you live Terje, but I wouldn’t trust my local reps to run a chook raffle, let alone set something as important as the minimum wage.

  13. Andrew R

    I’m speechless at your accusation.

    This is what I believe.

    I think the left is only half right with its correctly held view that wages need to be tightly controlled by government mandate. However the part left out is that we also need to ensure effective regulation of prices of goods and services just as tightly as wages. After all, why simply stop at wages. The average person needs to consume as well. This is the only way the left can demonstrate to the average person in this country that we care about their needs.

    The effect of this policy is that it would enable government to control inflation seeing that under this proposal it would be legislated out of existence. It would simply disappear in the plug hole of history.

    If firms were finding it hard under these new arrangements we could through a nationalized banking system ensure that funds are amply provided to those sectors that found it hard to survive. Of course interest rates would be set at a level that would ensure prosperity for the long term and there would be no more of these business cycles to worry about.

    If only wages are controlled and prices left to market greed we would only be solving half the problem.

    So please take this as a serious addition to the conversation we are having here. Control wages and control prices too!!!

  14. Steve,

    If you control prices the market will respond by moderating quantities.

    If you then control the quantities by nationalising industries or proping them up with subsidies then you will create inefficiencies. Without a price signal relative scarcity will not be communicated in a timely fashion and waste will proliferate.

    If you create inefficiencies then the total output will fall and we all become poorer (the most vulnerable first).

    You will also create a lot of criminals as anybody with sanity flees to the black market.

    When the Soviet command economy was in full swing they got KGB spies to obtain department store catalogues from the USA and elsewhere. It was the only way they could obtain prices to mandate that made some sence.

    If your system ever comes into being then most of us would either move abroad or move into the underground economy.

    Inflation is a situation in which the currency looses value. If you crush the economy with the policies you suggest then inflation will be more than happy to ignore its legal status.

    Regards,
    Terje.

  15. dogz Says:

    No SJ, that map was evidence in support of my asserion that most of the EU’s growth is coming from the new eastern-bloc additions. Go back and read the thread.

    If your economy is already extremely efficient, and you already have a GDP per capita 40%-50% above the EU, then it is unsurprising that you’re not going to grow that rapidly. You could use a similar argument for the lower growth in the old socialist Western European countries if they were at the top of the economic totem pole. But unfortunately they are not.

    Let’s recap. Growth in “sclerotic” Western Europe is about the same as in the US. Growth in Eastern Europe is higher. At some time in the past, growth in the US was higher, so it reached a level where its per capita GDP was higher, but then reverted to the same growth rate as “sclerotic” Western Europe (i.e. stagnated). And this makes the US an ovbiously attractive investment target now, for some as yet unexplained reason. Is that a fair summary?

    By the way, the difference in per capita GDP between the US and Europe isn’t due to some magical “dynami[sm]”. It’s almost entirely explicable by differences in hours worked:

    The stability of the U.S.-EU gap in relative income on a per capita basis comes from the decline in hours worked. To be specific, in the United States, over the period 1970 to 2000, GDP per hour increased by 38%. Hours worked per person also increased, by 26%. Thus, GDP per person increased by 64%.

    In France, over the same period, GDP per hour increased by 83%. But hours worked per person decreased by 23% — so GDP per capita only increased by 60%.

    So Americans have to work longer hours. Good for them.

  16. Hmmm, back to the Hausmann and Sterzenegger hypothesis and the issue of CAD or internal v external balances. The only recent example we have to the US predicament was the collapse of the Japanese stock market and real estate bubbles of the 80’s, their internal economy has stagnated for the past twenty plus years, kept afloat by a continuing trade and foreign income surpluses, discreet strategic withdrawals of capital from foreign equity operations and massive public spending. Shielding the banking system from reform did the rest.

    In the US, the FED under Greenspan reset interest rates to zero, then Bush ensured the loss of pain would be minimised to the twenty percent who actually own the US by substantial tax cuts. Together they were but the old monetary and fiscal stimulus tricks but this time targeted at the capital holders at risk. The pension funds (super funds) kept a floor under the stock market valuations, still at the 10,000 plus mark of the peak (Some may say they are merely flat-lining), Buffet and the chap at Yale who called it irrational exhuberance do not appear to have changed their views about the stock markets. Buffet Corp is finding it hard to park their cash probaly just as well given the off balance sheet liabilities now appearing courtesy of climate change and peak oil. A few high risk operators with implausible balance sheets went under, ENRON, WorldCom immediately, others trade under Chapter 11 protection (US Airlines). They have effectively devalued the currency since.
    It does seem more plausible that income from outside is a major factor masking the monetary proligacy of the US. The US has substantially diversified its production base over the years to outside the US so keeping the wheels of commerce well oiled. The expansion of derivative commoditisation has in the low interest rate environment masked risk, so very high risk activities are trading at low risk rates, the high risk activity is providing a substantial impetus as well but perhaps most importantly the seignorage on the US currency is perhaps doing the rest. The fact that the Europeans have fallen at the start on the EURO has created sufficient doubt as to it being a viable alternative to the dollar to keep everyone in US dollars, world commodity contracts written in US dollars as do the strong cross flows between China and the US help keep the trade in US dollars going. It is appears to me to be simply the mass of money keeping the US ship afloat not its direction of travel. Question is will world markets digest a second devaluation when an interest rise is next required? There a lot of holes in the US and Australian economic miracles and as predicted by the Reason Model those holes are starting to line up. The question is what factor will travel through all the layers and create a major accident. A crystal ball is about all that will help here. Israelis blowing the crap out of an Iranian nuclear site might just provide the trigger.

    Perhaps it is not so much a matter of dark matter but rather being so deeply in it you cannot see that you are?

    As for Oz? well the Liberals trick of stimulating the housing market has merely delayed the inevitable. As the Chinese curse goes; ‘May you live in interesting times’.

    Happy New Year, 2006 is going to be a very long one indeed.

  17. I’ve read with pleasure. Maybe it’s offtopic, but i just wanted to say, that it’s really interesting to read everything this with the comments… You discuss here a lot of interesting things on different useful themes. Thanks for that =)

  18. Steve Chidio:It’s only a small step for someone like you to reach the conclusion that I have reached in that in a post industrial age we don’t need free markets in anything.

    And it’s an equally small step for “someone like you” to decide that if he wants to sell strychnine-laced heroin on the streets that’s purely a matter of private business decisions between free individuals which governments shouldn’t interfere with.

  19. Andrew Reynolds:Achieving high growth rates from a low base is not difficult. The path to reasonable success is already mapped out for you – you do not have the expense of taking blind alleys to deal with. The fact that France has not radically outperformed the US, coming from a lower base (whether 50% or 70%) even without the blind alley costs to me indicates that there is a problem.
    Most of the nations cited were, at one time or another, among the wealthiest on Earth – they were then, for a long time, outperformed by the US. To me at least the reason is simple…

    but Andrew loking at the US Bureau of Labor Statistics figures I cite earleir, the US outperformance occurred primarily before 1960 – i.e. during after World War II.

    The time series data since then suggests that the Europeans have in fact been catching up.

    The single most important step they could take to accelerate that process would probably be to increase immigration.

  20. Let’s recap. Growth in “sclerotic� Western Europe is about the same as in the US. Growth in Eastern Europe is higher. At some time in the past, growth in the US was higher, so it reached a level where its per capita GDP was higher, but then reverted to the same growth rate as “sclerotic� Western Europe (i.e. stagnated). And this makes the US an ovbiously attractive investment target now, for some as yet unexplained reason. Is that a fair summary?

    I am not sure that US growth rate is as low as the sclerotic parts of Europe, at least not overall. Give some sources SJ.

    Why invest in the US over France:

    #1: if my investment is in a consumer-oriented product, the consumers have 43% more money to spend so it’s going to be an easier sell

    #2 less bureaucratic interference. No agents of the state hiding in bushes waiting to fine people who work too hard.

    #3 more flexible hiring and firing – far easier to get rid of underperforming workers.

    #4 stronger investment culture.

    #5 much better infrastructure (service professionals, investment professionals, trained workers) for high-tech startups

    #6 much larger domestic economy

    #7 greater meritocracy in the workplace

    #8 greater culture of achievement amongst employees

    (if you want more I can give you a lot more reasons)

    I wouldn’t invest in a unionized American steel company or airline, since they exhibit the same traits as sclerotic Europe. But I can find many more dynamic sectors in the US economy than that.

    That said, if France and old Europe as a whole are changing to adopt more investor-friendly traits, then I would invest there instead, precisely because they have a growth free-kick coming off their lower base.

  21. Ian, the difference between our PPP figures is just the choice of baseline: you say France is 30% less than US, I say US is 42% more than France. Both are correct.

    $27737/$39495 = 0.702
    $39495/$27737 = 1.424

    My figure is how a Frenchman feels migrating to the US (his PPP is 142.4% of what he had before), your figure is how an American feels migrating to France (PPP is 70.2% of what he had). All other things being equal of course, which they never are.

    Same phenomenon in house prices: a 25% fall in prices wipes out a 33% rise, since the gain is almost always expressed as a function of the starting price (before the rise), and the fall is expressed as a function of the end price (after the rise).

  22. Dogz,

    your preference for bthe US as a palce to invest doesn’t seem to be shared by the overall market if we compare the negative return on the Dow for 2005 (and low single-digit returns on S&P and Nasdaq) with the 20%+ plus returned by European indices.

  23. Dogz says:

    I am not sure that US growth rate is as low as the sclerotic parts of Europe, at least not overall. Give some sources SJ.

    Um, it was your own source that I used. If you don’t like the conclusions that follow from the data you provided, it’s kinda up to you to provide something else. Duh.

    Why invest in the US over France:

    #1: if my investment is in a consumer-oriented product, the consumers have 43% more money to spend so it’s going to be an easier sell

    I’m not sure whether you realise this, but people in the US are able to buy stuff that gets manufactured outside the US. And it seems that they prefer to do so, hence the trade deficit that John was talking about.

    The rest of your points are just hand-waving nonsense. Right wing talking points that don’t show any measurable result. For example, WTF does “stronger investment culture” mean, and why does it cause the US to be an attractive place to invest?

    Ian Gould Says:

    negative return on the Dow for 2005

    This is factually incorrect. The Dow started the year at about 10,600, and ended at about 10,700, i.e. a positive return of about 0.9% neglecting dividends.

    Of course, your point is well taken that the performance of the US market in 2005 was terrible in comparison to Europe. In fact, it was terrible in comparison to just about everywhere else in the world, not just Europe.

  24. The rest of your points are just hand-waving nonsense. Right wing talking points that don’t show any measurable result. For example, WTF does “stronger investment culture� mean, and why does it cause the US to be an attractive place to invest?

    Go live there SJ, and you’ll see what I mean. I have lived in both the US and France.

    I guess I prefer “Right wing talking points” to your left-wing BS. Especially when one of those talking points is 42% greater GDP per capita. It is clear that you have made up your mind that the US is inherently bad, much as the rest of the Australian chattering class, most without ever having set foot in the country.

    But I wouldn’t want to disabuse you of that notion SJ – you might not get invited to anymore dinner parties if you actually took a rational approach.

  25. Dogz: “It is clear that you have made up your mind that the US is inherently bad, much as the rest of the Australian chattering class, most without ever having set foot in the country.”

    Actually this debate started with you proclaiming the US superiority and condemning France and the rest of Europe.

    I suppose by your logic if one got into an argument with a white supremacist and argeud that other races were not in fact inferior that’d be an example of anti-white racism on your part.

  26. DogZ: “The Dow started the year at about 10,600, and ended at about 10,700, i.e. a positive return of about 0.9% neglecting dividends.�

    That was SJ, not me.

    I suppose by your logic if one got into an argument with a white supremacist and argeud that other races were not in fact inferior that’d be an example of anti-white racism on your part.

    I gave up on logic at SJ’s “The rest of your points are just hand-waving nonsense”. Little point arguing intelligently against that.

  27. Bringing back a draconian gold standard (every gram will equal precisely $35-49AUD) will enable us to sort the dogz from the catz, sheepz from goatz etc. If the 15th largest economy in the world can’t showz the wayz, who can?

    The rest of the world is panting for someone to take the lead and draw a line in the beach. The AUD could become a kind of benchmark. For something.

    In memory of Auric Goldfinger.

  28. If Australia were to implement a gold standard tomorrow then fixing the value of the Australian Dollar somewhere between 20 to 29 milligrams of gold would be highly inflationary and highly destructive. A more realistic and effective target would be somewhere between 50 and 60 milligrams.

    I am all in favour of a gold standard but I am not at all interested in a draconian gold standard.

  29. Lot of arguments here about whose is bigger, what is better pretty dissapointing reallly.

    GDP is an arbitary accounting standard for national account, nothing more nothing less, what you choose to count is up to you. Like all things ‘moderne captitalist’ the distinction is about bigger and better, so what? You have 5/6 of the worlds population in dire poverty by your measures so you are really arguing on the margins. The standard economics texts measure quantity and value (price) but have no vector analysis applied, try adding an arbitray Z factor to your equations and see what you end up with (Hint: you’ll need a simple matrix to solve multiple equations). The vector is direction, standard physics any body moves has mass speed and direction, get it!

    The issues raised went to the notion of continued borrowing my a country that sold most of its prime assets overseas, became a branch for various multinationals, borrowed more money to fund non productive real estate speculation, has foriegn borrowings at over 50% of national income, maintains a current account deficit in the negative range year after year, has little overseas income to offset this imabalance, and calls itself the lucky country. If I remember my old Prof correctly (said Donald), he was on about second rate idiots not luck. So what you gonna do when the cards at the limits the question?

    Don’t know what this gold standard crap is. The last mob to try it failed, the good old boys at the Bank of England in the early twentieth century. The crux is redeemability, my paper for your gold, how you going to do that witha derivatives contract? The paper value is arbitrary, see Keynes ‘General Theory’ for some illumination.

  30. Ian Gould says:

    Not according to Reuters

    Well, what I said about where the Dow started and finished the year is technically correct, but yes, you’re right, I came up with the wrong answer. I should have compared the end of December 2005 number with the end of December 2004 number.

    Dogz Says:

    I guess I prefer “Right wing talking points� to your left-wing BS. Especially when one of those talking points is 42% greater GDP per capita.

    I did ask you to reconcile your talking point with the existence of the trade deficit. You are apparently unable to do so. I believe I also asked you some specific questions relating to your “stronger investment culture” talking point. So much for your ability to argue “intelligently”, as you put it.

    Recall that this all springs from your initial assertion about why people invest in the US: “People invest in the US because it is by far the most dynamic economy on earth.” If you can explain this rationally, I’m still waiting for the explanation.

    You haven’t yet risen above the level of Dennis Denuto in The Castle: “it’s the Constitution, it’s Mabo, it’s justice, it’s law, it’s the vibe”

  31. Terje,

    1. In which sense can one country unilaterally implement ‘a’ gold standard? In other words, what do you mean by ‘gold standard’. I seem to recall we’ve been on this topic before. The term ‘gold standard’ has a meaning in the economic literatue. (This meaning is unaffected by your attitude toward Paul Krugman.)

    2. There are various grades of gold. Any suggestions as to which grade? (My question does not indicate in any way that I would support whatever it is that you seem to be advocating).

    3. How do you think knowledge of the quantitative relationship between the estimated amount of gold of various grades ‘under the ground’ and the dollar (fiat money) amount of foreign trade of a particular country would influence economic agents’ believes about the credibility of having ‘a’ gold standard as an anti-inflationary policy measure?

  32. mike hart Says:

    Lot of arguments here about whose is bigger, what is better pretty dissapointing reallly.

    Terribly sorry to have disappointed you. Why not go and try to set Brad Setser’s crowd straight instead?

  33. 1. The monetary policy I advocate (and refer to as a gold standard) is one in which the target of open market operations is a particular value for the national currency measured in gold. For instance we might have a target for open market operations that aims to hold the value of the Australian dollar between 49 millgrams and 51 milligrams of gold. Interest rates would float. I expect interest rates would tend downward towards the leasing rate on gold.

    2. Not overly important as long as it is clear. I would suggest a purity of 0.9999.

    3. If a nation has a lot of gold under the ground I don’t think it would make much difference to financial confidence or inflation expectations. Confidence in a nations monetary policy is more about politics and track record. There are two primary ways to get gold if you don’t have it. One is to invest a lot in digging it up. The other is to sell a lot of things in exchange for it. Obviously any nation should produce in the area where it has the greatest comparitive advantage.

    I know we have had this discussion before. Will De Vere is the one that raised it again, not me.

    If you want to use something other than “gold standard” to define the system I outline then call it a “gold polaris monetary standard”.

  34. What would be the policy objective of a “gold polaris monetary standard” for a single country?

  35. 1. Monetary stability.
    2. Cheaper credit.

    My two major criticisms of the current system are:-

    a) It targets consumer price inflation which is a lagging indicator. In the process it ignores monetary errors that show up in leading price indicators like commodities and currency spot markets. Monetary errors disrupts the proper function of price signals and investment decisions.

    b) It uses interest rates as a short term target for open market operations and in the process disrupts the process by which “credit” is priced.

    The current regime also builds on the mentality that says the economy needs to be managed by experts beauracrats, however this is more of a criticism of the political culture rather than of economic outcomes. I don’t think we need billionaires like Frank Lowy and Robert Gerard (or unionists like Bill Kelty) regulating the price of credit.

    We could also access deeper credit markets by either targeted the AUD-USD exchange rate or the AUD-EURO exchange rate. However we would I believe do so at the cost of monetary stability. I don’t think the EURO or in particular the USD are very stable reference points.

    Also there is a third major benefit should a single nation such as Australia adopting such a policy. It would provide leadership to other nations and make the possibility of bringing an orderly end to floating exchange rates more likely.

  36. Terje,

    Thanks for your reply. I would agree with the proposition that there are major unresolved theoretical issues in monetary economics. IMHO, the root cause of the problem is quite well described in the academic literature (eg Handbook of Monetary Economics, 1990). It is the absence of an adequate theoretical concept of ‘money’, which is of practical usefulness.

    While I appreciate your personal perserverance with a version of a gold standard, I don’t share your trust in the methodologies of the neocons (supply siders, economic rationalists….) – back to the future. For example, there is nothing in your model which even vaguely provides a link between the outcomes you want and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) would result in the outcome you want. People are asked to believe (even though both, theoretical knowledge and empirical data are at varince with the proposed beliefs). Words such as ‘leadership’ do not substitute for knowledge.

  37. Ernestine,

    You don’t trust the metods of the supply-siders and I don’t trust the methods of the current monetary regime.

    Just for fun can you offer me something in the model we currently use (ie RBA style inflation targeting) that vaguely provides a link between the outcomes you want (or think it achieves) and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) result in this outcome.

    Regards,
    Terje.

    P.S. I appreciate your personal perserverance in highlighting the current lack of an adequate theoretical concept of ‘money’. When your student publishes his/her work and you can speak freely then I would be interested in knowing more.

  38. Terje, you have the answer to your ‘fun question’ already:An economic agent model with a suitable concept of money. The methodology does not allow for outcomes one ‘wants’; its purpose is to allow a distinction between theoretical knowledge and raw ideology or wishful thinking.

  39. Ernestine,

    I get the impression that if we were on a “gold polaris monetary standard” and somebody suggested that we implement “inflation targeting” with a government body using open market operations to fix a given interest rate target then you would disagree with their proposal due to their lack of a suitable “concept of money”.

    In other words you are equally opposed to all monetary policy arrangements.

    Regards,
    Terje.

    P.S. I borrowed your earlier definition of “concept of money” to create a relevant article at wikipedia.

    http://en.wikipedia.org/wiki/Concept_of_money

  40. Terje,

    1. I am afraid, your impressions have nothing at all to do with me.

    2. So far I have not found one post written by you on this site which is original and useful on any economic topic. That means, in the absence of anything better, I strictly prefer the RBA’s work to yours.

    3. Since you borrowed my sentence you will have to return it.

  41. 1. Your fear has nothing to do with me.

    2. I can’t say I have learnt a great deal from you either but I have enjoyed some of our discussions (others have been quite painful). You don’t have to respond to my comments if you don’t wish. If you get nothing out our conversations then that is perhaps the best way to avoid a discussion. Of course how you proceed is up to you.

    3. Sorry wrong word. I copied. I will change the wikipedia article if you object. However given that johnquiggin.com is licenced under the creative commons terms, given that I copied (with modifications) one single sentence and given that I advised you of what I had done I did not think you would mind too much.

    4. I don’t know how you arrived at the following conclusion:-

    For example, there is nothing in your model which even vaguely provides a link between the outcomes you want and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) would result in the outcome you want.

  42. 1. English is a tricky language (as are others). Perhaps it would be clearer if I wright: Regrettably, you impressions about my thoughts turn out to be assumptons that are false.

    2. —

    3. First you told me you borrowed a sentence. My applied area of Economics is Finance. I take the word borrow seriously. Now you tell me that you copied the sentence, modified it, put it as an article on Wikipedea, refer to johnquiggin.com is licenced under the creative commons terms. I assume the ‘article’ has been put up under ‘no name’. Well, it seems to me the requirements for having a creative article put up on wikipedea are very modest.

  43. Sorry, I overlooked the last point.

    4. I reached to conclusion on the basis of information made available to me.

  44. Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…Lenin was certainly right. – John Maynard Keynes

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