Dear Dr. Langbert
I just came across your Blog. I enjoy reading the Blog.
Jason
Monday, December 21, 2009
James Turk on Socialism
James Turk has an excellent blog on Kitco. Turk suggests that the coming government debt crisis across Europe will trigger a reassessment of the current pervasive socialism. He extensively quotes Hayek and makes the argument that government uses wars and emergencies to expand state power. The extended state power continues during peacetime to expand the welfare state. The welfare state become subject to special interests and expands relentlessly. Presumably, in a democracy the public is not smart enough to understand the effects of the expansion, namely, declining standards of living and opportunities to make a living. As the state expands wealth declines. I would also add that income inequality increases because of government policy--specifically the Federal Reserve Bank's handling of monetary expansion. Turk argues that with the coming bankruptcies of many countries, the destruction that socialism wreaks is laid bare. Turk writes:
>"The ideological bankruptcy is neatly captured by British author and advocate for individual rights, Cecil Palmer: 'Socialism is workable only in heaven where it isn’t needed, and in hell where they’ve got it'. And government insolvency is explained by famed economist Frederic Bastiat, who made this levelheaded observation nearly 150 years ago about the nascent modern socialism then emerging. 'The State is that great fiction by which everyone tries to live at the expense of everyone else.' More recently, Margaret Thatcher, being a sensible politician, put it pragmatically: 'The problem with socialism is that you eventually run out of other people's money.'
>"Take Greece for example. This past week yields on its 10-year bonds surged in the wake of downgrades by the bond rating agencies, which finally recognized that Greece does not have the financial resources needed to repay its debts, which now stand near junk levels. Not far behind are Latvia, Spain, Ireland, the United Kingdom and almost every other country in Europe, even though they may still flog paper rated as “investment grade.” The reality is that the rating agencies just have not yet come to grips with the breadth and depth of widespread government insolvency, or have willingly turned a blind-eye to it. And don’t forget Iceland which of course has already collapsed."
Might socialism die with a bang? I doubt it. Americans and Europeans have adopted the mentality of slaves. 58% of the American population depends on some level of government for its living, according to Turk's numbers. And we wonder why income inequality is on the rise and the real hourly wage hasn't risen in 40 years? The blame must rest in part with academic economists, whose policies have been as short sighted as their econometric regression models.
What would a major international debt crisis do to the stock market? To gold? Intuitively I would think stock market down, gold up. But last year it was both down. It is extremely difficult to predict the markets because Wall Street has a strong pro-dollar mythology that will only quit when the US dollar goes the way of the Continental in the post Revolutionary War period.
>"The ideological bankruptcy is neatly captured by British author and advocate for individual rights, Cecil Palmer: 'Socialism is workable only in heaven where it isn’t needed, and in hell where they’ve got it'. And government insolvency is explained by famed economist Frederic Bastiat, who made this levelheaded observation nearly 150 years ago about the nascent modern socialism then emerging. 'The State is that great fiction by which everyone tries to live at the expense of everyone else.' More recently, Margaret Thatcher, being a sensible politician, put it pragmatically: 'The problem with socialism is that you eventually run out of other people's money.'
>"Take Greece for example. This past week yields on its 10-year bonds surged in the wake of downgrades by the bond rating agencies, which finally recognized that Greece does not have the financial resources needed to repay its debts, which now stand near junk levels. Not far behind are Latvia, Spain, Ireland, the United Kingdom and almost every other country in Europe, even though they may still flog paper rated as “investment grade.” The reality is that the rating agencies just have not yet come to grips with the breadth and depth of widespread government insolvency, or have willingly turned a blind-eye to it. And don’t forget Iceland which of course has already collapsed."
Might socialism die with a bang? I doubt it. Americans and Europeans have adopted the mentality of slaves. 58% of the American population depends on some level of government for its living, according to Turk's numbers. And we wonder why income inequality is on the rise and the real hourly wage hasn't risen in 40 years? The blame must rest in part with academic economists, whose policies have been as short sighted as their econometric regression models.
What would a major international debt crisis do to the stock market? To gold? Intuitively I would think stock market down, gold up. But last year it was both down. It is extremely difficult to predict the markets because Wall Street has a strong pro-dollar mythology that will only quit when the US dollar goes the way of the Continental in the post Revolutionary War period.
Sunday, December 20, 2009
Which Is Better: Strong or Weak Dollar?
My old childhood friend from Queens, Barry (actually, it goes further back because our mothers were friends in the Bronx in the 1930s and 40s), just sent me this message about the dollar on Facebook and I respond.
Barry:
>Is the "problem" with the dollar that it is too high or too low in comparison with other currencies? If the dollar falls, all of our export industries become more competitive, but we end up with a dose of inflation because our imports become more expensive. If the dollar strengthens, we keep cheap imports but have an increasingly hard time competing abroad. Which is better?
My response:
>That's one of those paradoxes, much like wages. Should an employee be paid more or less? If less, he cannot afford to pay his bills. If more, his employer may go under. Which is better? The answer is that practical human reason cannot answer that question. Rather, market forces can deliberate for us. Allowing the market to do so has the effect of allowing resources to be used most productively. If we set wages too high, there will be a reduction in demand for labor and a surfeit of supply. If we set them too low, there will be a labor shortage and the best people will start their own businesses. Rather, let us allow the market to tell us how high wages ought to be, and firms produce efficiently and fairly.
Being fair to both sides allows supply and demand, including supply and demand for labor, dollars, shoes and anything else, to fall into equilibrium. With respect to dollars, that would be done by letting them float. Firms might lose some predictability with respect to their overseas plants, but why should the public subsidize the risk aversion of big companies? Let them stay home if they wish to avoid currency risk.
In the post war period there was a peg to the dollar. But President Nixon printed too many dollars and so the peg was not sustainable. There was a run on the gold in Fort Knox as foreigners (Americans were not permitted to do this by law) cashed in their dollar bills for gold. So Nixon (a) abolished the transferability of Euro dollars into gold (that had been done for American dollars by Roosevelt in 1932) and (b) floated the dollar. Floating exchange rates, which I believe were suggested by Milton Friedman, work great in theory, but firms required long term stability to make plant decisions. To accomplish this stability, the central banks, the Chinese, Japanese, Saudis, Europeans and others have been holding onto large sums of dollar denominated bonds, informally duplicating the pegging system of the post war period. But the US has been printing more and more dollars. This makes us richer at the other countries' expense. You can cheat others once or twice, but over many decades they began to grow weary of it.
You are right that there are distributional effects of monetary policies. Under the current system the global demand for dollars is exaggerated (also exaggerated because the legal tender law increases domestic demand for dollars--we are not allowed to refuse dollars as payment for goods or services). As a result, the dollar made strong by foreign holdings makes our exports less competitive. More generally, the stability of the artificially propped up dollar has encouraged firms to move overseas. A propped up dollar benefits US manufacturing firms that have moved overseas, and so this policy has contributed to de-industrialization. Also, the Federal Reserve Bank's interest rate and monetary expansion policies have facilitated many firms' moving overseas.
The US government has thus encouraged de-industrialization, driving out manufacturers and sending them to China. China also has low labor costs, and it is difficult to say exactly how much of the move is due to the artificially high dollar and how much is due to low labor costs in China. My guess, which is completely intuitive and not rational, is 20% is due to money. So that 20% of manufacturing might come back here if the dollar were allowed to float.
The up side (besides the huge benefits to manufacturing firms and Wall Street) is that consumer goods have been cheaper.
The down side is that the system is unfair and so unstable. Winding down the dollar subsidies by the international central banks will hurt the vast majority of Americans. The dollar's purchasing power will diminish so that people will become poorer. The real cost (inflation adjusted) of all goods will go up, also guessing, 20%. Maybe a lot more, but no one knows.
So imagine a situation where there's a 20% increase in factory jobs and a 20% reduction in standards of living. Will most Americans appreciate the trade? I think there may be widespread dissatisfaction, and maybe rioting in the streets. But that extra margin (maybe 10% maybe 100%) of benefit to consumers will be lost to us.
On the one hand, the deal has been sweet for US consumers. But on the other, like all subsidies, for instance a rich heir who does not have to work, the windfall has made Americans used to an artificially high standard of living. Note that the standard of living we should be enjoying today is probably not that much higher than it was in 1971. Real (inflation adjusted) hourly wages from 1800 to 1970 increased around 2% per year. Since the abolition of the gold standard in 1971 real hourly wages have increased a total of 2% in almost 40 years. More people work two jobs now and much more families are two income, so it's not going to affect most people to the degree that they will have to give up all the consumer gains. But our standard of living, for the first time in history, probably needs to be adjusted downward by a sizable chunk. The retailing jobs that we will lose because of lower consumer demand will be replaced by manufacturing jobs.
Barry:
>Is the "problem" with the dollar that it is too high or too low in comparison with other currencies? If the dollar falls, all of our export industries become more competitive, but we end up with a dose of inflation because our imports become more expensive. If the dollar strengthens, we keep cheap imports but have an increasingly hard time competing abroad. Which is better?
My response:
>That's one of those paradoxes, much like wages. Should an employee be paid more or less? If less, he cannot afford to pay his bills. If more, his employer may go under. Which is better? The answer is that practical human reason cannot answer that question. Rather, market forces can deliberate for us. Allowing the market to do so has the effect of allowing resources to be used most productively. If we set wages too high, there will be a reduction in demand for labor and a surfeit of supply. If we set them too low, there will be a labor shortage and the best people will start their own businesses. Rather, let us allow the market to tell us how high wages ought to be, and firms produce efficiently and fairly.
Being fair to both sides allows supply and demand, including supply and demand for labor, dollars, shoes and anything else, to fall into equilibrium. With respect to dollars, that would be done by letting them float. Firms might lose some predictability with respect to their overseas plants, but why should the public subsidize the risk aversion of big companies? Let them stay home if they wish to avoid currency risk.
In the post war period there was a peg to the dollar. But President Nixon printed too many dollars and so the peg was not sustainable. There was a run on the gold in Fort Knox as foreigners (Americans were not permitted to do this by law) cashed in their dollar bills for gold. So Nixon (a) abolished the transferability of Euro dollars into gold (that had been done for American dollars by Roosevelt in 1932) and (b) floated the dollar. Floating exchange rates, which I believe were suggested by Milton Friedman, work great in theory, but firms required long term stability to make plant decisions. To accomplish this stability, the central banks, the Chinese, Japanese, Saudis, Europeans and others have been holding onto large sums of dollar denominated bonds, informally duplicating the pegging system of the post war period. But the US has been printing more and more dollars. This makes us richer at the other countries' expense. You can cheat others once or twice, but over many decades they began to grow weary of it.
You are right that there are distributional effects of monetary policies. Under the current system the global demand for dollars is exaggerated (also exaggerated because the legal tender law increases domestic demand for dollars--we are not allowed to refuse dollars as payment for goods or services). As a result, the dollar made strong by foreign holdings makes our exports less competitive. More generally, the stability of the artificially propped up dollar has encouraged firms to move overseas. A propped up dollar benefits US manufacturing firms that have moved overseas, and so this policy has contributed to de-industrialization. Also, the Federal Reserve Bank's interest rate and monetary expansion policies have facilitated many firms' moving overseas.
The US government has thus encouraged de-industrialization, driving out manufacturers and sending them to China. China also has low labor costs, and it is difficult to say exactly how much of the move is due to the artificially high dollar and how much is due to low labor costs in China. My guess, which is completely intuitive and not rational, is 20% is due to money. So that 20% of manufacturing might come back here if the dollar were allowed to float.
The up side (besides the huge benefits to manufacturing firms and Wall Street) is that consumer goods have been cheaper.
The down side is that the system is unfair and so unstable. Winding down the dollar subsidies by the international central banks will hurt the vast majority of Americans. The dollar's purchasing power will diminish so that people will become poorer. The real cost (inflation adjusted) of all goods will go up, also guessing, 20%. Maybe a lot more, but no one knows.
So imagine a situation where there's a 20% increase in factory jobs and a 20% reduction in standards of living. Will most Americans appreciate the trade? I think there may be widespread dissatisfaction, and maybe rioting in the streets. But that extra margin (maybe 10% maybe 100%) of benefit to consumers will be lost to us.
On the one hand, the deal has been sweet for US consumers. But on the other, like all subsidies, for instance a rich heir who does not have to work, the windfall has made Americans used to an artificially high standard of living. Note that the standard of living we should be enjoying today is probably not that much higher than it was in 1971. Real (inflation adjusted) hourly wages from 1800 to 1970 increased around 2% per year. Since the abolition of the gold standard in 1971 real hourly wages have increased a total of 2% in almost 40 years. More people work two jobs now and much more families are two income, so it's not going to affect most people to the degree that they will have to give up all the consumer gains. But our standard of living, for the first time in history, probably needs to be adjusted downward by a sizable chunk. The retailing jobs that we will lose because of lower consumer demand will be replaced by manufacturing jobs.
Saturday, December 19, 2009
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