Let it Shine

Money versus Gold

You ever see that movie The Saint?

Well in that movie Elizabeth Shue gives a lecture on Cold Fusion, which for most of my life I though it was the most amazing lecture I've ever heard in regards to a fanciful, magic discussion on a complex topic. Until I read this piece of shit.

First off, you have forgotten the most influential and most important concept of money: it is a community good--meaning the more people that use it, the more it is worth.

Second, your issue that the breakdown of the Bretton Woods system, and the end of the gold standard, led to the economic woes of the 1970s gives wayyyyy too much power to policy makers and not in the hands of the invisible hand.

Third, You might be stupid enough to sign into a long-term contract without stipulations for inflation adjustments, but most sane people are not. In the finance world are many instruments to deal with changes in interest rates, inflation or exchange rates. For example, there are swaps, were a firm hedges exchange rate or interest rate movements by balancing that investment in an offsetting position. For example, say my boss decides to pay me in Rupiah, I would then take an equal amount of money and put it in dollars, then any shift in the exchange rate (Rupiah versus Dollars) would result in me receiving the exact real salary regardless of exchange rate changes.

Fourth, I dollar in its value does include interest. For example take a look at the uncovered interest parity condition: R=R* + S (where S is the exchange rate in domestic currency, r is the domestic interest rate and r* is the foreign). A dollar does accrue interest when in comparison to foreign currencies, if you do not take advantage of those movements, then that is your own issue. You collect on that interest when you visit a developing country and buy a 2-dollar shampoo and face massage, or purchase cheap textiles from China.

Fifth, gold's value in arts and jewelry make it very useful. Currently in Vietnam (and most of East Asia) gold is skyrocketing because it is a very auspicious year to be married (the Goat). Hanoi's jewelry shops have had a 30% increase in gold in the past 6 months.

Sixth, regarding the Bretton Woods, you missed the point. The US fiscal irresponsibility led to its inflation to be exported to the other BW countries (in a fixed exchange regime there is always 1 minus the number of participating countries, and in BR it is argued that their was only 1: the US).

Gold being the most sensitive to monetary changes, it illuminates future price changes. First its price changes, then the other commodity prices follow...

Actually, I spend more time reading tea leaves than looking at gold prices to judge commodity prices, but then again I actually get paid to do this type of thing. Really, I'm curious where you get the correlation between say Oil and Steel and Cotton and Coffee to Gold, where gold, not only correlates, but also is the head. Don't you think that if that were the case, then the markets would clear out prior to the occurrence to a change with such a perfect predictor of the coming change thus negating the price change completely?

Besides the CPI's lag making it difficult to match monetary movement with price movement, it also has a tendency to overstate inflation.

Which is why people look at several stats to reach a conclusion, such as industrial output and productivity.

As the dollar strengthened, Thailand now needed to defend their currency and monetarily deflate along with the dollar. The result was catastrophic. The loans that had been granted earlier now had to deal with a stronger baht and evaporating markets. Investors were forced to default on their loans, setting off a banking crisis in which more than 50 financial institutions suspended operations. Then on July 2, 1997, Thailand floated the baht. However, it was too late, and she had already been squeezed.

Ok, please read at least one serious description of this episode before you comment on it. The AFC (Asian Financia Crisis) has been widely covered and there is no reason to suddenly declare Greenspan and Fiat money a cause for the crisis when there are already many other things to blame. For future reference, refer to the following three points made by Rudi Dornbush:

First, they lent too much to ambitious real estate projects, such as commercial office towers, contributing to a glut that undercut expected profits. Second, the banks lent too much to companies owned by government officials and their friends, willingly disregarding serious problems in many such companies. Third, they made too many short-term loans in foreign currencies (usually U.S. dollars), making borrowers extremely vulnerable to any devaluation in the local currency (which is exchanged for dollars in order to repay the loans).

Ok I'm done, now, I need to get back to work. But really the big question is: what is stable? I think if you really took some time to realize the difficulty in that very absolute concept (as well as other silly notions like "balanced economy" or "pro-poor growth") then you might stop worrying and learn to love fiat money. It is perhaps the MOST efficient market there is; currency markets always clear! They don't behave rationally, but you should target your blame at the irrationality of individuals, and write a paper on how we should be more like robots.