The G-7’s finance ministers assume you don’t know what money is

Group of Seven finance ministers and central bankers said the credit-market rout will slow economic growth and strengthened calls for China to let its currency appreciate.

The group also urged an “accelerated appreciation” of the Chinese yuan as Europe and Canada joined the U.S. in complaining it remains undervalued and threatens their trade balances.

So far, not interesting. China, as discussed here a few times, is a sovereign country. It will act in its own self-interest, and so far that does not include being bossed around by the G-7. The EU still has its Common Agricultural Policy. The US still has subsidies all over the freaking place. If China chooses its subsidiy to be a low exchange rate, that is their right. More importantly, China can’t stop its behaviour without inviting a crunch in the labour market that it doesn’t know how to handle – because it’s never had to, previously.

We should be trying to help them deal with unemployment and establishing a welfare state, rather than harrying them over the Yuan.

More importantly/amusingly:

The G-7 set aside differences over the dollar’s drop to a record low against the euro, sticking to past language in saying “excess volatility” in currencies is “undesirable” and that they should trade in line with fundamentals. Other than the yuan, no specific currency was mentioned.

The only possibly conclusion I can draw is (a) they’re all hypocrites, or (b) we’re returning to the gold standard! “trade in line with fundamentals” – that is fundamentally incompatible with fiat currency: the simple deposit multiplier, with its debt standard of currency value, most certainly is not “in line with fundamentals”.

The ministers also started in on sovereign funds, which is fine. I stopped reading, frankly. These are the same people who tell us things like “don’t panic: the liquidity crisis is well-contained”.

Energy Accounting

Returning to the idea of nagging China endlessly over its currency, while ours is backed only by the ever-weaker promises of a nation of borrowers. Energy Accouning is something I’ve come across lately – it is an approach to commodity money, but not the gold standard, and not barter (reserved for perishable goods, which never work as money). This time, the commodity is energy:

Energy accounting would replace money in a Technate, but unlike traditional money or currencies, energy units could not be saved or earned, only distributed evenly among a populace. Energy credits or certificates would probably not have to be physically used by the populace themselves, as the system would be computerised. In this proposal, the Technate would use information of Natural resources, industrial capacity and citizen’s purchasing habits to determine how much of any good or service was being consumed by the populace, so that it could match production with consumption.

The amount of energy each citizen would have would be equal to what they spend, thus they never have to worry about running out or budgeting, the only constraining factor being the Technate’s resource base and Technological level. The reason for the use of energy accounting, according to Technocrats, is that it would ensure the highest possible standard of living, as well as equality, among the Technate’s citizenry.

I don’t really follow the Technocratic movement’s model that well (but, then, it dates back to at least 1955): as their wikipedia entry explains, the idea of distributing the currency, rather than having it serve as a store of value, will likely break down (particularly in a peak oil period).

Consider this, though: our current model of fiat currency works, more or less, according to the same ‘rules’: debt, as long as it is increasing, increases “money”. Our belief in the surety of economic growth (at least as directed by our politicians) relies upon the idea that technology will remove the scarcity of the serious resources (oil shale, anyone? Switchgrass?). So…

Their model, and perhaps the model itself, has the serious pragmatic difficulty – countries currently very wealthy do not have much, relative to other countries, in the way of energy-producing natural resources. Good luck getting that kind of re-balance. It also provides the very worst kind of incentive: a ‘gold rush’, of sorts, to extract/identify the maximum energy potential from a country’s natural resources early on, to establish wealth. The technocratic movement’s model really only works absent globalisation.

The idea has some appeal, though. We’ve given effective plutocracy more than its fair share of opportunities – maybe technocracy would work better? I refer to the Asian application of it, not the Western one (the former holds – in theory, but often enough in practice – government to account; the latter is just too bossy for our tastes). At least we’d build things to last, once more.

At the very least, debt is not a commodity: debt is not a fundament of an economy, or its strengths (at least, it is not supposed to be). It can’t buttress the money supply forever.

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9 comments so far

  1. opit on

    North Korea was accused of depositing counterfeit American currency in the Bank of Macau : it’s deposits were frozen.
    Iran’s bank deposits in American dollars are compromised by the U.S.
    Just today I posted another incident of U.S. dollar accounts being at the whim of American ‘policy’ ( good forgettery. I did do a quick look to see if I could spot the article. )
    My question ? Don’t these acts disqualify the U.S. dollar as a medium of international commerce more thoroughly than anything else could ? Dishonouring a promissory note ( notes, actually ) seems to be the act of one who wishes to destroy their validity in the most effective fashion.
    I’m no economist. I’d be delighted to hear a rationale for apparent insanity.

  2. zooeygoethe on

    To some extent. I tend to fall back on this article from Foreign Affairs:

    http://www.foreignaffairs.org/20070501faessay86308/benn-steil/the-end-of-national-currency.html

    on national currency. The US d0llar benefits from (and is over-valued by) the greater demand than their mere economy: NGOs, multinationals, small countries (it is the currency of a few Pacific island nations. East Timor comes to mind).

    To my mind, it’s like the old debt joke: if you owe the bank a million dollars, you have a problem; if you owe the bank 100 million dollars, the bank has a problem.

    It would be fairly destabilising for another currency to become the international medium of exchange. Amongst other things, it wouldn’t replace the US dollar in a lot of areas, leaving the ‘true’ value uncertain.

    I also don’t think any other country truly wants their currency to be over-valued, the way the US dollar has been (the EU, for example, has too many exporters – and China has demonstrated well enough that a weak Yuan is just their cup of tea).

    Meanwhile, think about ‘big’ trade items (military/food aid, weapons, oil) – a lot of it is done with the US, and the US will do it in US dollars. It’s still the biggest economy, after all.

    What we’re more likely to see is more firms/countries/etc. at least ‘get out’ of the dollar as a store of value/ready cash. It just isn’t worth losing purchasing power like that (not necessarily because they’re losing it thanks to blithely dysfunctional US policy).

    Whether this intensifies a/the cycle of US dollar value depreciation will depend upon a lot of other things (like US debt, oil prices, its own recession, should one eventuate).

    Middle-Eastern countries, meanwhile, are recognising that their oil-trade-based ‘pegs’ aren’t going to work for them, as they fight their own inflation problems:

    https://economicobjectorvism.wordpress.com/2007/10/19/oil-and-the-dollar-part-whatever-were-up-to-now/

    so that will have an impact also. Of International Political Economy-ish interest, of course, will be how far they let their currencies drift, what that does to oil prices for the US specifically, and – in cases such as China, but certainly with the increasing clout of sovereign funds, generally:

    https://economicobjectorvism.wordpress.com/2007/09/30/chinas-simeconomy-a-usd200bn-foray-into-sovereign-wealth-funds/

    the currencies into which they spread their exposure will also be interesting. Whatever they pick will appreciate in value (e.g. the Australian dollar, as they pursue our commodities) – will their pick be merely economic, or political also?

    How much harm that much cash flowing back into our economies does is also something to worry about, meanwhile …

    And you looked for rationality …

  3. opit on

    That I can deal with. Humanity is not a ‘rational’ species so much as a ‘rationalizing’ species.

  4. opit on

    BTW – Thinking about your comment on cash flowing back into economy… That is the natural result of companies opening up subsidiaries and receiving payments on investment.
    And rationality strikes again. I asked if the currency would not be made ” worthless” and you said “worth less”.

  5. zooeygoethe on

    Fiat currency can be made worthless – but not that of countries like ours. Too many people will still accept it at a relevant value (truly the only criteria that matters), and the US really won’t go bankrupt.

    The Iraqi dinar – the fiat currency of Saddam Hussein’s Iraq, backed by the promise of Saddam Hussein’s government – was used by Iraqis after the fall of Saddam Hussein.

    If a fiat currency backed by nothing whatsoever will work, anything can.

    In terms of interntional media of exchange/stores of value, I don’t see the US dollar becoming “worthless”. I see its prevalence weakening, sure (“worth less”, as you identified – but you’ll also never get a straight answer from an economist!) but – even with nothing but debt as their commodity, the US economy is still too big. Even if, say, it collapsed (or suffered “economic panic”, that old thing that supposedly disappeared with the last depression), it (a) is still a formidable source of resources, including human capital, and (b) it (presumably) won’t do so alone, so it will still be big, relative to the rest of us, as we all take a hit.

    Best-case scenario, for me, is our money going back to being securely backed by some commodity of merit (not debt). If every individual understood that holding a dollar bill was a gamble on the debt behind its very existence, that’d be fine – but that will never happen.

    I must remember to ask if my University will pay me in gold and silver from now on …

  6. […] I question an Economist […]

  7. opit on

    Not silver ? More seriously, we do have an international currency standard that is based on energy : that’s why oil no longer trades at $26/b

  8. zooeygoethe on

    Silver would work. It’s a big component of much of our electronics, so its value isn’t going anyway. Gold is ‘better’, because it isn’t a commodity in the applied sense, so much as just valuable because people are kind of silly (like how we over-pay for diamonds, relative to other precious gems).

    Oil no longer trades at USD26/barrel, though, for more reasons than oil. It is rather volatile – we wouldn’t want a medium of exchange that fluctuates wildly (the moreso, given peak oil) at the whim of every other OPEC meeting (there is also the political issue, of not handing that sort of thing over to anyone but our good, strong, – Christian – anglo-saxon tribes).

  9. opit on

    What did you think the U.S. and U.K. were up to in the Middle East ? Asset robbery and/or control : monopoly.


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