Wednesday, March 13, 2013

Tamny 2

Suddenly, it dawned on me.

The key issue in Tamny's diatribe against Market Monetarism is foreign exchange rates.    Or more exactly, it was an attack on floating exchange rates.

Market Monetarists, like Traditional Monetarists of the past, do not favor fixed exchange rates but rather believe that exchange rates should adjust according to the supply and demand for different monies.  

Tamny claims:

 Just as a floating foot and minute would lead to a lot of building and cooking errors, floating money would and does foster a great deal of malinvestment and trade disharmony for turning voluntary, economy-enhancing exchange with stable money as the measuring stick into something where trading partners are increasingly at odds.

Incredibly, I read "trading partners" as being just any old buyer and seller, not different countries.

I was puzzled by this talk of "floating money," a bit, understanding that to mean money of unstable purchasing power.   In other words, a fluctuating price level.

But I imagine that Tammy isn't all that worried about the value of money relative to goods and services, but rather the value of "the dollar" against "the euro" or "the yen."   And the trading partners he has in mind are "the U.S." and "the European Union," and "Japan."   

Tamny wrote:
About money, it should be remembered that it was conceived long ago solely to facilitate the exchange of goods, and as a way for market actors to measure the value of investments. That’s why the historical understanding of money was that, in order for it to be effective, it must be as stable in value as possible.
I have always leaned towards Menger's account of money.   It was not "conceived" for any purpose at all, but rather evolved.     Of course, that supposed Mengerian evolution was very much about the facilitation of the exchange of goods.   But I was very puzzled that anyone would think that the introduction of metallic money at the dawn of history was intended as "a way to measure the value of investments."

But suppose that instead we are considering the choice of joining the "gold block" in the 19th century.      A conscious decision was often made by politicians to tie the value of their country's money to gold, because that was the money used by the leading nations of the world.   Not only would it facilitate the international exchange of goods, but more importantly, it would facilitate foreign investment and a net capital inflow.   The U.S. consciously chose to adopt a gold standard after the fiat money inflation of the Civil War.   It was a major "Blue" versus "Red" battle, with the Democrats favoring silver and the Republicans gold.

For a small, undeveloped economy, perhaps adopting the monetary standard of the rest of the world, especially that of capital exporting countries, seems wise.    Foreign investors can simply look at the nominal yields on debt instruments, and that will tell them all they need to know.   (Well, ignoring default risk, but having the dollar tied to gold likely helped 19th century U.S. investment bankers sell dollar-denominated bonds to investors in Great Britain and Holland.)

Anyway, Market Monetarists do favor targeting spending on output, and as far as monetary policy is concerned, that means that that exchange rates are left to adjust with supply and demand.   And, of course, the dollar price of gold is left free to adjust with the supply and demand for gold. 

For a small, open economy with a fixed exchange rate, what Market Monetarists count as monetary theory is pretty much irrelevant.   For example, there no need for someone to make sure that there is enough money in the Town of James Island to support economic growth.   If we produce lots of goods that other people want to buy, we can sell them, earn money, and then we have all the money we need to buy what we want.    Sure, that money comes from the rest of the U.S. economy, but we are so small, any impact on them and, more importantly, any feedback from those effects back on us, can be ignored.   Create a good business climate in the Town of James Island, produce lots of goods and services that others want to buy, and the money takes care of itself.

But then, when there is an imbalance between the supply and demand for money for the U.S., the Town of James Island, like everyone else in the country, suffers a recession.

 In the 19th century, if Canada needed more monetary gold for some reason, there would be no problem.    They would get it from the rest of the world.   But then, when the world demand for gold grew more rapidly than the world supply of gold in the thirties, all the countries on the gold standard suffered a disastrous Great Depression.

Most Market Monetarists, like most Traditional Monetarists, lean libertarian.   We do tend to focus on economic prosperity for the average people.    Suppose instead that high on your list of concerns is protecting the international credit of the central government, with a special interest in being able to borrow to fund wars?   Suppose instead that national preeminence is important, and the days when the dollar, currency of the leader of the free world was tied to gold, and all of the other currencies were fixed to the dollar, is counted as a golden age?

What do you mean let the dollar float?     If you understand their priorities, the "economics" of the neoconservatives at Forbes makes sense.    It might not always be sound economics, but it has strong roots in the "common sense" of the 19th century.


  1. Well, I am not sure the Tammy diatribe--a club blow from monetary Neanderthalism---really deserves an answer.

    Perhaps Woolsey has nailed Tammy's underlying agenda---fixed exchange rates, and frozen price levels, and a strong dollar, all to benefit the global American Archipelago (and a fantastically expensive empire at that: The USA outlays $1 trillion a year on the VA, Defense and Homeland Security).

    But I think Woolsey credits Tammy too much. There is just a monetary caveman crowd around, that rants about inflation and the need for a strong dollar.

    I think if they have an agenda, tperhaps they really represent bondholders.

    That is an even more-frightening idea: In Japan, I assume the huge bond holding class (the only asset worth owning for the last 20 years) plays a role in that nation's abject fixation on zero inflation (now perhaps ending) and even deflation.

    Time will tell.

    I would like to see m
    Market Monetarists explore the idea of "good deflation." My suspicion is that there is no such thing. A general deflation will always make it appealing to hold onto cash, and punish investing in real estate (for both lenders and borrowers).

    Yen in the mattress has been a better investment in Japan for the last 20 years than equities or property.

    Is that really a way to prosperity?

  2. I think deflation is just fine when it reflects improved productivity.

    With the sort of privatized monetary order I favor, if people hoard currency under the mattress, they are still lending money to banks, which in turn lend money to fund real consumption and investment spending by other households and firms.

    The "problem" of excessive deflation would occure if the banks issuing currency could only earn low nominal yields and found issuing currency unprofitable. The "solution" would be to just allow currency shortages to develop. People can use deposit money.

    Under the status quo, a deflationary policy would increase the demand for currency, and the central bank could and should issue more currency. While the currency hoarded would do little good, when all of that extra currency was issued and used to pay down the national debt, that money wasn't funding real capital goods anyway.

    Of course, if the government finds issuing currency unprofitable, fails to issue enough, and has the entire financial system based upon the hand-to-hand currency, the result is depression.

  3. Bill-

    I always enjoy your intelligent commentary.

    Perhaps I am just too timid to go "all out" and embrace monetary freedom.

    I believe a sovereign nation has some powers, pertaining to justice, national security and printing money.

    As a practical matter, I worry that a private banking system, when stressed, would lack the gravity and authority to make things right.

    Really, are the guys at AIG or LTCM or Bear Stearns or Citigroup really the type you want in control of printing money?

    So, as a practical matter I am a Market Monetarist, though I am open to re-configuring the FOMC to represent a broad range of industries, or doing away entirely with the FOMC, and having a Fed Chief appointed by the US President, for coterminous service.

    As a voter, if I don't like macroeconomic policy, how do I vote now?