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John Quiggin 
It was never going to be rocket science to beat the nanny staters
http://www.news.com.au/story/0,10117,18985122-421,00.html?from=rss
Speaking of AFL Footy and rocket science, what about the Dockers/Saints result? Given the circumstances, my take would be to award 4 points for the win to the Dockers AND 2 points for the draw to the Saints. My reasoning would be that all the other clubs faced with either situation would believe they were deserving of those points. Strictly speaking the Dockers won at full time in the event the siren was heard. However play goes on until an umpire blows his whistle so naturally the teams played on until it was. What say you fans about this split of points.
While we might be able to get away with this compromise in a minor round game, any recurrence of such a schemozzle would be disastrous in finals, bearing in mind how close last years GF was. All I can say guys, is you need to take a leaf out of the girl’s book here. The last time I kept time for SA Netball Association’s State League game at ETSA Park, the time clock was linked to a vibrating pager in the umpire’s pocket, to prevent any doubts about when the siren sounds in a packed noisy stadium. It aint rocket science either fellers.
The following letter appeared in my local paper (Canberra Times) on Saturday. I couldn’t resist a reply, though the 250-word limit imposed on letters is a bit constraining. I have deleted the author’s name. Others may wish to try their hands or criticise my suggestions. Economists might be allowed to disguise themselves.
This is the letter:
And this is my reply:
Hmm, I would have thought all those Chinese workers increasingly prepared to work for our over-enthusiastically printed dollars would have got a look in there somewhere with our inflation gordon. OTOH perhaps their bosses were prepared to pile a lot of it back into inflating our asset prices as well. Without that confluence of factors, perhaps all those printed dollars might have had the usual outcome.
Gorden,
I don’t really agree with your reply. Higher taxes do not reduce inflation. If anything an upward move in taxation would reduce the demand for currency and all else being equal this would cause inflation. In fact Reagan attacked inflation by cutting the tax rate (as did Hawke).
“Interest rates” are a price. They are the price of credit. When interest rates go up they are in fact another example of a price rise. The RBA and other central banks often filter out such price rises when looking at inflation. They also often filter out commodity prices (eg oil, gold, silver, copper, coal) with the view that excessive domestic demand can’t be the problem in these cases.
The question posed by the writer exposes an interesting point. An increase in interest rates may take more money from some peoples pockets but they add an equal amount of additional income to other peoples pockets.
An interest rate increase is achieved using open market operations. In practice this means taking currency out of circulation (or reducing the rate at which new currency was being added). Given the cash flow needs of businesses (and banks) this reduction in cash in circulation causes a slow down in trade that realigns the entire financial system with the output constraints of the economy.
Amoung the many reasons that I advocate a commodity standard is that the operation of monetary policy is more readily communicated to the lay person. Under such a standard a concern about inflation is not addressed by increasing the price of credit (although such an increase may follow) but rather by reducing the price of commodities. Intuitively this is much easier to sell to the uninitiated. Although those more experience with the current paradigm would probably find it harder in the way that older people found the move to metric difficult.
Regards,
Terje.
Gordon,
My apology for spelling your name wrong in the message above.
Regards,
Terje.
I said:-
This should be qualified. It is not so much that trade in real good decreases but rather than the terms of trade between currency and real goods changes.
Regards,
Terje.
I would guess, Observa, that low-wage Chinese workers manufacturing low-cost imports operate rather like an “industrial reserve army” of unemployed, keeping wages (of Australians) down. I presume this is what you mean. Offshoring so much production would act to strengthen the “barrier” to general price inflation to which I referred. A good point. Unemployment and underemployment in Australia operate in the same sense, providing another layer of sandbags.
Is it just me, or is the formatting of this site currently whacked?
I’m working on it, wilful.
Terje observes: “Interest rates� are a price.
Which made me wonder (me not being an economist) why the price of the dollar is floated and set by demand, but the Reserve Bank sets interest rates, instead of also letting them float, to rise and fall as demand for interest rose and fell.
I imagine Terje, who wants to fix the dollar to something, would argue against such a float, but why weren’t interest rates floated at the same time as the dollar? (I hope I haven’t misrepresented or misunderstood your opinion here Terje, and I mean no offence if so!)
Also, I’m not sure that comprehensibility by the uninitiated public is a good basis for economic policy. It would seem that the best system that is transparent enough that it can be overseen and guarded against corruption by enough eyes, might be better than the best system that can be readily understood by the ‘uninitiated’. Still, as I say, I’m not an economist; I have a psychology essay to finish writing.
(BTW, Terje, how does one go about pronouncing your name? It doesn’t look very English so I wonder if the “j” might be meant to be pronounced like in French or German or something.)
Alexander,
I advocate fixing the dollar to gold (or a commodity basket). I advocate letting interest rates float. Robert Mundell is famous for saying that with one arrrow you can only hit one target. If you fix to gold then you need to let interest rates float.
Having everything float would mean there was no rule at all to guide the creation of new currency. Unless you believe that the base money supply should be entirely static you need to fix to something or have some rule or principle to guide usage of the printing press.
Their is a kind of lie put about that floating exchange rates is a free market concept. This is bunk. Currency is not created by the private sector. The government has gone to great lengths to explicitely prohibit private sector currency. Whether it floats or drifts or sinks it is all still government controlled.
Regards,
Terje.
Their = There
Terje says:
1. “I advocate fixing the dollar to gold (or a commodity basket).”
2. “There is a kind of lie put about that floating exchange rates is a free market concept. This is bunk. Currency is not created by the private sector.”
But gold is also not created by the private sector. I conclude Terje’s theory is bunk in terms of its own premise.
“Terje observes: “Interest ratesâ€? are a price.”
True.
But Terje is mistaken because
r = (1$[t=1]/x$[t=0]) – 1.
r denotes a one-period interest rate
t is an index of dates.
Ernestine,
Very profound – may I suggest you put QED at the end, and, for the non-mathematically literate, may I also suggest you use words?
If I interpret your “proof” correctly, you are saying that Terje is wrong because of the way that a one period interest rate is calculated. Some may not understand this proof.
Andrew,
I don’t understand your post.
You say “Some may not understand this proof”.
I say, it would be a great worry if somebody would “understand this proof” because there is no “proof” involved. I’ve given the definition of a one-period interest rate.
I am not going to provide words because I would consider it insulting to Terje (and others). There is ‘loose language’ in some of the old economics literature he may have read.
My theory would be bunk if I had said that a gold standard was a free market solution. However I did not. I merely assert that it is no more nor any less of a free market system than a fiat system with an interest rate target.
QED.
Ernestine,
Interest rates are not a price. However Interest is.
Regards,
Terje.
You have not defined ‘x’. And I wonder whether you meant something other than 1$ given that it does not really make for much of a time series and the [t=1] would then seems a bit pointless.
I suspect that what you meant to write was:-
r = (i[t=1]/x[t=0]) – 1
where:-
r = interest rate.
x = principle owing (in dollars).
i = interest repayment (in dollars).
If this is what you meant then i[t=1] is the price of lending x[t=0] for an interval of 1.
Personally I would have written it as:-
r[t] = (i[t]/x[t-1]) – 1
Such that the interest rate for period t is r[t].
From which we could derive the following:-
i[t] = (r[t]+1).x[t-1]
Where “.” means multiply.
Which would clearly show that whilst an “interest rate” is not a price, the interest payment (which is a price) is very closely related to it. So when we negotiate the interest rate on a loan we are in essence negotiating a price. And if we increase the interest rate we are in essence increasing the price.
An interesting corrollery to all this is that if “interest” is the price of “credit” what is the price of “currency” (ie the price of money proper as opposed to the price of the money derivative). The price of currency is nothing more than the goods and services that one must trade in the process of acquiring currency.
One could complicate this by looking at the process of paying for goods using credit (eg an EFT payment) but in this instance we have four parties involved. The buyer, the seller, the buyers bank and the sellers bank. And a web of agreements that fascilitate the trade.
In other words inflation is a fall in the price of currency.
Terje,
Turge. Tur-jay. Tur-yay. Tur-ya. Tiray.
Which, if any, is correct?
TAY-A
I think it rhymes with “dirge”.
Serves me right… I stand corrected. Freudian slip perhaps?
I have changed my logon name to include the phonetic version.
“[But gold is also not created by the private sector. I conclude Terje’s theory is bunk in terms of its own premise. ]
My theory would be bunk if I had said that a gold standard was a free market solution. However I did not. I merely assert that it is no more nor any less of a free market system than a fiat system with an interest rate target.
QED. ”
I consider this reply a word game.
Ernestine,
I said what I did because you said Terje is wrong “…because…” and then gave the definition. To me, you have said that Terje is wrong because of this definition. If you were not trying to prove him wrong with the equation, could you please let me know what you were doing?
Really. I find that odd.
You took two of my statements and then tried to infer a theory from them. You said that this theory was bunk. I agree that the theory you infered was bunk. However it was not my theory.
Let me be clear about my position. If the RBA stopped using open market operations to achieve an interest rate target and instead used open market operations to achieve a gold price target then:-
1. I would agree with their change of policy.
2. I would not call it a free market system or solution.
The only reason that I brought up the free market was because Alexander mentioned the fact that the Australian dollar was “floated” some time ago. It is often argued that a system of floating exchange rates is somehow a free market solution, whilst a system of fixed exchange rates is somehow not. There is no reasonable basis for this dichotomy and that was the point of my comment.
Andrew,
Ernestine is right when he says that an “Interest Rate” is not a price. I was wrong when I said otherwise. His formula makes that clear because an “Interest Rate” is a dimensionless quantity. The “unit of account” on the top half of the fraction is dollars and it cancels out with the “unit of account” on the bottom half. You can’t have a price without a “unit of account”.
However his technical correctness is not of much substance to the discussion. Whilst an “Interest Rate” can not be a price it implies for any given amount of principle a very clear amount of “Interest”. And Interest is the price of credit.
I was surprised when he accused me of word games because he seemed to be arguing over a trivial technicality.
Regards,
Terje.
Andrew says:
“I said what I did because you said Terje is wrong “…because…â€? and then gave the definition. To me, you have said that Terje is wrong because of this definition. If you were not trying to prove him wrong with the equation, could you please let me know what you were doing?”
1. Terje says: “Ernestine is right when he says that an “Interest Rateâ€? is not a price.”
2. Terje’s reply illustrates that your assumption about the innumeracy of people may be wrong.
This leaves the question of what is your problem. But, take this as a rhetorical one which does not require an answer.
Ernestine,
Your technical correctness does not detract from Andrews implied accusation. Which I think could be stated as; “why do you focus on the trivial technical weaknesses in a persons line of argument rather than the core substance of their argument”.
My own observation (accurate or otherwise) is that you feign a distaste for people who are argumentative in nature but your pedantic technical focus on minor points is in its own way an unnecessarily argumentative style.
I suspect you do this more through a love of precision and habit than due to any malicious intent. I would not for a moment suggest that I don’t sometimes suffer the same failing.
Regards,
Terje.
Terje says:
You didn’t do the dimensional analysis correctly. The units are dollars per dollar per unit time. Dollars per dollar cancels out, but the time dimension remains. The dimension is T-1.
Superscript works in preview, but doesn’t show up in the actual comment.
The dimension is T^(-1).
BTW, I wouldn’t argue with your assertion that an interest rate is a “price”.
It’s the time value of money. Loosely expressed, that’s a price.
Ernestine Gross says:
Is this “loose language” purely limited to “old economics”? What, for example, would you understand by the words “price of money” in this statement:
Or this one:
Ernestine,
This discussion is followed by many – as the comments here by many people indicate. To attempt to continue the discussion in mathematical terms, as you did, I find disrespectful to those here who may not follow.
Marshall’s suggestion to burn the mathematics, at least while writing for the general public, I find useful. Perhaps you would be more persuasive if you attempted to write more like him – although I wonder if that would be too far down for you to go.
FWIW, I did understand the mathematics, as I also knew Terje would. I did not see how this constituted a proof of Terje’s main argument being wrong, as you seem to be contending it did.
SJ,
I can’t add very much to what I wrote before.
I wrote: r = (1$[t=1]/x$[t=0]) – 1, r denotes a one-period interest rate, t is an index of dates. I can add: for a given r>0, x
SJ,
My post was cut off. I’ll try again:
I can’t add very much to what I wrote before.
I wrote: r = (1$[t=1]/x$[t=0]) – 1, r denotes a one-period interest rate, t is an index of dates. I can add: for a given strictly positive interest rate r, the quantity x is less than 1 and, equivalently, for a given quantity x less than 1, the interest rate is strictly positive.
The interest rate equation specifies a standardised relative price (quantity of dollars ‘now’ in exchange for 1 Dollar ‘later’).
Why don’t you ask the authors from whom you have quoted whether they agree with me.
Andrew,
I find it disrespectful to assume, as you seem to do, that people, other than you, are innumerate.
How would you know what Alfred Marshall (1842-1924) would say these days. Pitty we can’t ask him.
What I’d say, Ernestine, is “lay off the maths if you want people to understand what you’re talking about”.
Very funny, ‘Alfred Marshall’.
I love this quote from the Wikipedia entry on Alfred Marshall:-
Ernestine,
Given the full quote above, I think it would be reasonably easy to work out what Marshall would say about it.
I also still do not know how this is relevant to Terje’s main line of argument – but I am sure that you know how it is relevant. We are not, and cannot all be, associate professors. Professor Quiggin manages to keep it all to a level that the general public has a chance of understanding. May I suggest you learn from his example?
Andrew, aren’t you exaggerating a bit? You are telling me that the public doesn’t understand the label ‘interest rate? In my experience, this is not the case. May I suggest you speak for yourself.
Please consult with Terje to find out about his main line of argument. I can’t help you in this regard.
Ernestine,
I am not saying the general public does not know what an interest rate is. I am saying that many may not understand how time displacement in an algebraic equation is represented or how it may be used in a proof.
I repeat my request above – “If you were not trying to prove him wrong with the equation, could you please let me know what you were doing?”
Andrew, Please re-read the thread. Thank you.
Oh, a technical point on the difference between interest and an interest rate. Glad it was worth it.
You’re welcome.
Here is an edited version of what I said to Gordon with the offending “Interest Rate” versus “Interest” mistake removed and a few other minor edits:-
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I don’t really agree with your reply. Higher taxes do not reduce inflation. If anything an upward move in taxation would reduce the demand for currency and all else being equal this would cause inflation. In fact Reagan attacked inflation by cutting the tax rate (as did Hawke).
“Interest” charges represent a price. They are the price of credit. When interest rates go up they are in fact another example of a price rise. The RBA and other central banks often filter out such price rises when measuring inflation. Central banks also sometimes filter out commodity prices (eg oil, gold, silver, copper, coal) with the view that excessive domestic demand can’t be the problem in these cases.
The question posed by the writer exposes an interesting point. An increase in interest rates may take more money from some peoples pockets but they add an equal amount of additional income to other peoples pockets.
An interest rate increase is achieved using open market operations. In practice this means taking currency out of circulation (or reducing the rate at which new currency was being added). Given the cash flow needs of businesses (and banks) this reduction in cash in circulation causes causes a change in the terms of trade between currency and real goods and realigns the entire financial system with the output constraints of the economy.
Amoung the many reasons that I advocate a commodity standard is that the operation of monetary policy is more readily communicated to the lay person. Under such a standard a concern about inflation is not addressed by increasing the price of credit (although such an increase may follow) but rather by reducing the price of commodities. Intuitively this is much easier to sell to the uninitiated. Although those more experience with the current paradigm would probably find it harder in the way that older people found the move to metric difficult.
Regards,
Terje.