Dec

12

I saw GB on TV talking about the 3G. Fear mongering, yes; self interested, yes. But some of it made me think. A Reader.

Modern currencies are no longer based on physical assets — rather, they are a proxy for productivity and an extremely convenient and efficient medium of exchange. Expanding money supply when population and productivity is also expanding is not such a big deal — and in fact is necessary, as long as the money supply doesn't excessively exceed the productivity (wealth creation and improved standard of living). Case in point is that in the last couple of decades we've seen huge credit expansion without significant inflation. In having adopted capitalism, BRIC countries are currently new global growth engines doing a large part of their trade in US dollars, the world's reserve currency. Their productivity, and the rise in standard of living of increasing portions of their populations, counts hugely in the overall productivity equation, because we have a global economy. And certainly don't count out the US. It still has the largest GDP in the world by far, and it may not be growing much right now because of the credit readjustments currently under way, but it can certainly hold its own at wealth creation when things settle.

Also, inefficient government spending isn't necessarily waste. That money goes somewhere — payrolls, goods and services procured from the private sector, investment by the private sector, etc. It participates very actively in the broader economy, if for no other reason than providing a market for more efficient private sector big businesses and small enterprises. If people did nothing but hoard it, then that would be more problematic, but typically it's either spent or invested.

Medicare/Medicaid — Health problems work counter to productivity, either directly by taking people out of the work force, or indirectly by pulling them away to care for sick loved ones. If the medical system can keep more people on their feet and in better health, that takes some strain off productivity as well. Medical coverage would alleviate an enormous amount of stress about health and financial concerns for millions, which hurts productivity and even exacerbates it by causing health problems. People are resources too in the productivity equation, and maintaining these resources in good operation condition helps overall productivity. There is a cost — understood – but there is a payback too.

At issue here may be how some of these major shifts redistribute wealth. Doing it by force by targeting specific groups for taxation (e.g. the "rich") and political vilification is counter-productive because it sends the wrong message about how wealth is created it disincents risk-taking and wealth-creation. And too much stimulus may cause inflation and cause the debasement of paper asset-based savings. (Too little and you have deflation, choking off the ability to finance wealth-creating resources and activity, and the markets for the goods and services created.) Too much debt could ultimately lead to a default or devaluation, but I doubt that even that will cause the end of the financial system as we know it. Many countries have seen their currencies go worthless, and then have bounced back with a new one (you personally just don't want to be holding a lot of paper when they go down). Even that is not the end of the world.

I don't know if the current medical coverage plans are "affordable" or not, or whether the stimulus debts are too big; I just want to make the point that it's not all one-sided and all-bad. You have to look at both sides of the ledger and try to see how it nets out.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.

Gary Rogan replies:

What’s wrong with deflation? Some of the best years in American financial history happened while prices were decreasing. Is anyone concerned with deflation in computer prices? Is it good that the dollar lost 95% of its value since 1912? Why can’t you just keep some money in a savings account and have it maintain its long-term value? Wouldn’t that give a sense of security to millions of people? There is absolutely no reason for expanding the money supply by any “unnatural”, meaning non-free market ways. Even in the problematic fractional reserve banking system, supply and demand are perfectly capable of setting interest rates and the money supply.

And government waste is just waste. It means that people who could be doing something productive don’t do anything productive. That’s a loss of potential output, which is pretty much the definition of waste.


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3 Comments so far

  1. alex west on December 14, 2009 10:41 am

    >Gary Rogan

    Is it good that the dollar lost 95% of its value since 1912?

    it’s BS being repeted and repeated and repeated..
    how can it be measured ???

    how much did cost aspirin , flash disk, direct flight NY to Tokio and on on on… in 1912… ???? you cant say..
    it didnt exist yet..

    so how can you make up basket of services/products in 1912 and 2009 to check dollar pricing power ???

    and last one..
    just comparing prices for something in 1912 and 2009 doesn make
    any sense.. you should take into account average salaries IE
    how much can you buy on average salary in 1912 and 2009..

    its economics 101

    goog luck
    alex

  2. Gary Rogan on December 15, 2009 12:17 am

    Alex, aspirin has been sold as “Aspirin” by Bayer since 1899.

    As for your argument, are you arguing that inflation is a metaphysical concept like how many angels can dance on the head of a pin? And that this is econ 101? Or that inflation loses it’s meaning over long enough periods?

    Let me just respond by pointing out that this would be similar to arguing that one can’t compare the Dow Jones Industrial average today to when it was founded because only GE still remains from the original list and there were only 12 stocks in it back in 1896. Well, someone has come up with some rules about how to replace and add companies and there is a really good track record, and we can measure “inflation” in the Dow, no problem at all.

  3. JK on December 15, 2009 12:51 am

    Reply to alex west

    But you need more units of the dollar to buy a bread for instance?

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