Cullen Roche is right when he writes that "a government with a monopoly supply of currency in a floating exchange rate system has no solvency risk unlike a nation such as Greece which exists in a single currency system with what is essentially a foreign central bank. A government with a monopoly supply of currency in a floating exchange rate system is never revenue constrained" - i.e. it can always write a check that the Federal Reserve will clear. The only problem is that such a system literally makes people chattel. They are never in the position where they can save wealth that stands beyond the government's reach. To put it in terms that Washington, Hamilton, Madison, Jackson, Grant and Cleveland would all have agreed, the citizens have the fundamental right to insist on holding their savings as specie. And why should this matter? The answer is one that even the most rabid Keynesian acknowledges: when people can insist that the government exchange its monopoly currency for gold, the price of that currency - what it will buy - remains wonderfully stable. Some things get more costly and others get cheaper; but there is no persistent, steady devaluation similar to what the last century has offered people who have chosen to keep their money in a cookie jar.

There is another reason why a financial system has to have room for people who want to just say no, who, in Anthony Newley's words, want to "stop the world and get off ". If a "monetary system" does not allow the citizens and foreigners both to withhold their money and thereby restrict the government's ability to expand legal tender, the entire information structure of rational expectations itself begins to collapse. Everyone - even Marxists - now pretty much agrees that economic decisions are based on expectations about the future; only the Marxists persist in the fantasy that those expectations can be perfectly realized. If that is so, then where to the mistakes go? Where is the trash can for the part of investment=savings that never pays off? For the economist Wynne Godley this question - and the inability of equilibrium theorists to answer it - called into question the entire notion that prices themselves represented some perfect meeting of supply and demand. The only area where, in fact, supply and demand perfectly met was in the financial part of the economy. Everywhere else both individuals and firms needed what Godley called a "buffer", a saved resource for future income and spending that whose price was itself uncertain. Historically, for individuals the buffer was saved money that did not depend on the government's fiat; for firms it was money, in part, but also something more. For a goods producer the buffer was inventory; for a service firm it is slack labor capacity. That was, in fact, how the system of the production, distribution and sale of goods and services actually worked. In Godley's words, "outside financial markets there is neither need nor place for equilibrium conditions to bring supply into equivalence with demand." But, as [Dailyspec contributor] Tyler McLellan and others have properly reminded us, under a fiat currency system, equilibrium is always and everywhere present. It is literally impossible for firms and individuals to adjust the quantities and terms of trade at will without affecting the quantity of money itself. The result is a world where the needed buffer is nothing but an accounting entry and the banks and other dealers in credit have no actual money reserves. The further consequence is that individuals and firms have no means of calculating what an adequate buffer should be; their only possibility of finding safety is to trade in political influence so that enough of the persistent inflation of the money supply is directed to their pockets.

The ever watchful Charles Pennington adds:

The graph is a bit mis-specified. It is more accurate to plot the price level on a log scale.

This shows that inflation has decreased since the 1970's.

That said, I agree with Stefan's remarks.


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