Trump challenges the prevailing wisdom again, this time in pushing
Judy Shelton for the Federal Reserve Board.
This mystery bedevils central banks. Productivity—the ability of workers to produce goods and services of real value to others ever more efficiently—is the indispensable ingredient for prosperity. Orthodox theory predicts that lower interest rates should stimulate more investment, and more investment should stimulate more productivity.
Yet since President Nixon slammed shut the gold window in 1971, interest rates broadly have fallen and Wall Street has become hyperactive alongside a declining rate of Main Street productivity growth. Only occasional tax reforms and the 1990s computer revolution have reversed that overarching trend, but never permanently and never to the level that obtained midcentury.
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Recent academic research suggests she’s correct. Economists at major central banks and elsewhere have studied the extent to which capital mispricing by central banks (they don’t always put it that way, but that’s what they’re describing) depresses productivity growth, whether by allowing larger firms to crowd out more-productive upstart competitors or sustaining zombie companies or any of a host of other mechanisms.
12 comments:
Productivity growth indeed remains disappointingly low, despite all the talk about(and even the considerable reality of) robotics and AI.
There is a lot more to the productivity equation than technology and capital investment. Excessive/bad regulation, runaway litigation, bad management...all these things are productivity-killers. How much productivity is lost due to unwise mergers/acquisitions and to subsequent spin-outs? Also, shortcomings in education have a real impact on productivity.
In Zeynep Ton's book 'The Good Jobs Strategy', she describes the way that expensive inventory-control systems are made inaccurate because they are fed with bad data by untrained and harassed employees.
These things are not as easy to quantify as capital investment level, but they matter.
I reviewed Zeynep Ton's book here:
https://chicagoboyz.net/archives/60771.html
Misallocation of investments is a foreseeable consequence of investment (or divestment) for policy reasons. Abraham Lincoln, for instance, wanted the federal government to keep investing in canals even as (privately funded) railroads were starting up. When the rail system reached a business peak, the government continued to support building more. Even today state and federal governments collude to build new rail lines, both "light" short haul and "fast" long distance; despite lack of demand.
Policy "influencers" protest and demand mutual funds, pension managers, university endowments, etc all divest in energy companies, Israel, companies that support (or fail to support) abortion, etc.
I could go on all day...
I've always had an interest in restoring the gold standard, although I can't be sure how much of that is romanticism on my part.
I know what you mean. My father opposed the departure from the gold standard for his whole life, but I worried it suggested unrealistic nostalgia. I'm no longer so sure. Something's clearly wrong with fiat currencies being left to the mercy of people who are lying to themselves and to us, because a currency means nothing in the long term without trust. Is pegging the currency to a limited commodity really the answer? All I know is I'd like to see it discussed openly and rationally, rather than burning heretics.
Gold is a commodity. No different from pork bellies, oil, or wheat. It is worth exactly what someone else will offer you for it. So the idea that a currency tied to the price of gold is somehow immune to the vagaries of the market are simply not true. As are the claims that gold has only risen in value.
Here you can find a chart of the price of gold over the past 100 years. Please note the extraordinary volatility of that price. It went from an all time low of $236.98/oz in December of 1970 to the record high of $2172.26/oz in ten years. And it currently sits at $1,566.75/oz. Now, does being tied to a commodity have any advantages over a fiat currency? Well, in the sense that as long as you actually have the commodity on hand, the money will absolutely be worth whatever the market currently says it's worth.
But, and this is key, are there disadvantages? Absolutely. The biggest of which is that your economy is strictly limited to only trading the currency based upon the amount of the commodity you actually have. Banks currently do not actually hold the cash reserves of all of their depositors. Most of those funds are tied up in loans the bank makes in order to earn interest for their depositors. If your cash is bound to a commodity, the bank can no longer lend based upon (what is effectively) IOUs, and thus the whole loan/mortgage/interest system is lost overnight. A fixed asset is good in that it is always worth what it is worth (mind you, that value WILL fluctuate based upon the market value, but it absolutely is worth that market value). It is bad in that it cannot be "floated" and used in the complicated trades that allows our actual economy to grow without regard as to our national stockpile of a given commodity.
Can disastrous inflation and currency devaluation occur with a fiat currency? Yes. Absolutely, and there are countless examples of it. But fiat currency allows what a fixed asset currency simply cannot. And that is the exponential growth of a modern economy. The governments of the world didn't throw out fixed asset currency because they lost their collective minds and made the decision out of lunacy. This is just Chesterton's fence all over again. If you do not implicitly see the reason we unshackled ourselves from a fixed asset economy, go back and understand the origins before trying to do away with fiat currency.
Can disastrous inflation and currency devaluation occur with a fiat currency? Yes. ... But fiat currency allows what a fixed asset currency simply cannot.
This is, at bottom, an irrelevancy, which too many gold bugs keep missing. All currency is fiat currency, including currencies tied to a metal or any other concrete thing. Mike is mostly right that any fixed asset is worth exactly what someone else will offer you for it. That's not quite it, though; the asset is worth what the buyer and seller agree it's worth; the buyer isn't the only player in the exchange. Absent the exchange, no value exists, which is not the same as no value.
The larger factor here, though, is government. The asset backing a nation's currency is worth what Government says it is, and when Government has a monopoly on (legal) possession of the asset, that matters overwhelmingly. FDR demonstrated this, for instance, when he confiscated every American's privately held gold and then sharply changed the value of it in dollar terms. (And, of course, when Nixon took us off the gold standard, nobody got his seized gold back.)
FDR wasn't the only one, though; governments have been altering, at convenience, the value of the assets backing their currencies ever since currencies were invented.
All the asset backing does is slow the process much below the speed of market and thereby give false pricing signals on everything else in the market--even otherwise free markets--which leads ultimately and inevitably to the "need" to revalue the asset, often in Darth Vader terms.
The only way a free market works is if it's truly free, and that must include a currency that floats without the distortions of Government. That's also the only way international trade can work best--a Ricardian comparative advantage only works when the advantage can be accurately measured, and that requires a freely moving currency.
Eric Hines
You can go back to gold or plat if amis get rid of fed reserve. Trum cannot fire the fed reserve, that is how much slabery as freedom usa is in.
https://youtu.be/HHs5M3pyd3Q
Fixed assets are a bottleneck. But mike s point does not use cryptocurrency.
Generally the knights templar created banking to safeguard fixed assets.
What the modern system does is slavery 3.0
How much debt you have is how much you are a slave to system. And the system is not your government. Fed reserve is not your government i hope publically educated folks know that.
So essentially fiat currency allows an indirect tax 3 times. You are taxed income. You are taxed via inflatation. You are taxed after death, when borrowing, paying x interest rates.
Why are yoi paying interrst whrn the money is printed by private bank cartel?
Can cryptocurrency be mined. Yes. At the print rate? No
E hines is correct about gov market manipulation.
But this does not apply to the usa, as the federal reserve has more control. Presidents can aolid the fed but the f r is independent cabal of citizens, foreigner, 9r traitors. Keep that in mind.
My link above explains the dots behind why deep state even exists
Currency theory just makes my head hurt. I guess it makes sense to tie currency values to precious metals if there are sufficient quantities of the precious metals, but then who decides what the currency price is against that benchmark? The market just isn't pure enough to do that without people sticking their fingers in. So I just keep it simple: I learned early the difference between making payments against debt to setting the same money aside, then paying cash. Do the math once, and you're cured. No debt is a very good feeling.
MikeD
If your cash is bound to a commodity, the bank can no longer lend based upon (what is effectively) IOUs, and thus the whole loan/mortgage/interest system is lost overnight.
I don't think this is correct, and it seems to me to be a big stumbling block to people understanding what the gold standard really is. Banks, i.e. lending institutions, don't have anything to do with a gold standard. The government issues the currency and redeems the dollar for gold, not the bank, though the bank may act as an agent for the transaction. We had fractional reserve banking for hundreds of years prior going off the gold standard. They are not incompatible. More dollars can be in circulation than the government has gold available to redeem for the same reason fractional reserve banking works. The government only really has to worry about foreign currency arbitrage that would cause people to redeem it's currency for gold in order to buy another currency if the exchange rates are out of whack. A country with a healthy economy is going to have a currency that is worth more, i.e. holding investments denominated in that currency get a better return, than holding the actual gold so the arbitrage risk to the government is low. There's also nothing that says I can't offer to straight up exchange a foreign currency I hold for another currency without the gold swap in the middle if I've got a reason to think the exchange works in my favor (i.e. I'm importing or exporting a popular product)
I hit Grim's google link and found this article https://mises.org/wire/econ-establishment-teams-denounce-judy-shelton to be informative about both Shelton and what she has to say about the gold standard.
I think a psuedo-gold standard of the Fed working their interest rate policy from the price of a basket of industrial commodities might be the best medium-term solution. To E Hines point, this is a way of getting political considerations out of setting Fed interest rate policy so it's tied to something based on market operations.
I don't think this is correct, and it seems to me to be a big stumbling block to people understanding what the gold standard really is. Banks, i.e. lending institutions, don't have anything to do with a gold standard.
If your currency is on a fixed commodity standard (like gold), then you never can have more currency than you have stores of that commodity without devaluing the currency. This literally is the basis for the whole "free silver" movement. They wanted to debase the currency, because supplies of gold made the dollar too expensive, and was crippling farmers and others who needed to take loans (again, on a limited supply of dollars) in order to make it through winter and planting seasons. If you have a fiat currency, you don't need actual cash in hand for a transaction, because the money is abstracted. No one today expects to be able to take their paper currency into a federal bank and exchange it for the equal value in gold. But that's precisely what is required for a gold standard currency. So there can never be more dollars in circulation than the federal reserve banks can convert into physical gold. The GDP of the United States last year was $19.4 trillion dollars. There are approximately 11.7 billion one dollar bills in circulation in the US, with 8.9 billion 20 dollar bills and 11.5 billion 100 dollar bills. There are about 39.8 billion notes in circulation all together. That leaves 7.7 billion $5s and $10s. Let's assume they're ALL $10s, that gives a total value of less than $1.5 billion in currency that is in circulation. We're FLOATING ten times that much, YEARLY in domestic product. How exactly do you propose that we lay hands on that much value in gold? Or do we simply debase the currency MASSIVELY in order for the dollar to match the value of gold we actually do have? And once we do so, just realize that the GDP will never again be able to grow beyond the stocks of gold we can hold.
Because, and this is the TL;DR takeaway from all this, in order for you to have more dollars than you have gold (with a gold based dollar) is to float the currency apart from the gold stocks and wham you're back into a fiat currency. That's what a fiat currency is.
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