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Friday, January 27, 2006

More on currency, Part I

When I linked to the Iranian Oil Bourse article, I don't want to imply that dollars are backed by Oil, in some sort of 1 to 1 correspondence. I think the guy is overstating the case.

The economic fact of the matter as I see it is, if nothing is backing the dollar, then that means that everything is backing the dollar.

In other words, all the goods and services that can be bought with dollars are "backing" the dollar. Think about it. When you take a $20 out of the ATM, you do so because you expect that you can buy something with that. And you have a pretty good idea of what that something will cost. That's the only reason why you want that bill.

This adds a little more weight to the metaphor of wage slavery as well. Because our labor is being farmed by the banking system, in an indirect way. We're holding up the dollars that they are printing for themselves with our labor. In a real sense, we're backing up their debt with our labor.

This is why it is important to them to avoid deflation at all costs. The neo-classical economists will often claim that deflation would be a "disaster". Well, it would be a disaster for the ruling class. And in the economists' minds, what's good for GM is good for us, and vice versa. They have compressed that shortcut in their minds such that they don't really question it. Which is why they deserve the ridicule they get from skeptics... this is also why they constantly speak of "growth" without really going any further. Because in their minds, it is obvious that "growth" is a good thing for "the economy" (whatever that is).

But the question of distribution changes things a bit...
Consider this scenario. Imagine if you will (it's not too hard) that 5% of the population owns 90% of the wealth.
Now imagine that there are two policy options.
Option A will increase the amount of wealth by 3% across the board for 10 years.
Option B will decrease the total amount of wealth by 3% for 10 years, but will reduce the share held by the top 5% to 75%.
For 95% of the population, Option B is the better option.

Which option do you think the ruling class prefers? What do you think a mainstream economist would say about Option B? "A disaster!"

3 Comments:

Blogger Gabriel Mihalache said...

Well, I'm a neoclassical economist of sort and I wouldn't say that! :-) In any case, your treatment is unfair to some people but right-on for most.

Some of the macro work out there IS really bad. There's no doubt about it. That being said, some people (the best people) will agree that in a few circumstances deflation might be justified.

As for your A/B question, I'd say that the best strategy would be to put in place a system that is not reliant on a master-planner to choose for us.

Also, I disagree that if X% of the population owns Y% of the wealth that's something all that relevant: rich people don't keep their wealth in gold bars in their basements, but in credits given to businesses, firms, investments and so on. This wealth is not static and aimed at getting misstresses and fast cars (not all of it :-) but it's powering most human activity.

You might want to bring into discussion the idea of control, that these few people control all of these processes, but their influence over outcomes is less than we might think and probably less ominous that we might imagine at first sight.

On a political note, I don't find it surprising at all that few people have a lot of control over economic life since this situation is only a mirror image of the government (what it is for politics).

5:00 PM  
Blogger iceberg said...

Option A will increase the amount of wealth by 3% across the board for 10 years.
Option B will decrease the total amount of wealth by 3% for 10 years, but will reduce the share held by the top 5% to 75%.
For 95% of the population, Option B is the better option.


I don't follow this line of reasoning - how could any reduction of wealth help anybody?

Did you mean that a reduction in monetary inflation, will lead to less losses through price inflation for 95% of the population?

5:47 PM  
Blogger FSK said...

You have it backwards:

Option A increases wealth across the board by 3%.

Option B decreases wealth across the board by 3%, but increases the concentration in the top 2% from 75% to 99%. However, real inflation is 6%-15% but the CPI is 3%, so a wealth decrease can be touted as a wealth increase.

Option A is decried by economists as the disaster, Option B is lauded as progress.

Option B is what is actually occurring.

If you adjust for inflation PROPERLY, using M2, M3, or the price of gold, instead of the forged CPI, you would find that US GDP is *DECREASING*.

2:13 PM  

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