Friday, January 2, 2009

A brief history of princely debasement

Excellent repost at The Big Picture. Originally from Institutional Advisors. It is a brief historical facts of taxation abuse and how debasement of the currency has always been the way of government. It is a good read.

The current way of debasing of course is for governments to print money to themselves, by central banking and fiat money. This creation of money, or fiat money, can effectively be used as a stimulus, in the Keneysian sense. In the US it is used to achieve quantitative equilibrium.

Critics point out that it is appropriation by the community, as the government has created a pool of money for its own spending, without equivalent and offsetting income or taxation. Furthermore inflation will be a residual effect of the creation of this monetary mass. How much inflation will result is fuzzy and depends on price elasticity of goods. China has exported net deflation, through its immense production capacity, just in time production gave us great elasticity. In other words, if your economy can absorb your monetary injection, use it.

And in effect, fiat money is a taxation, an indirect one, therefore politically palatable. The printing of money by the US has effectively turned on the chinese economy and the chinese government buys treasuries in its own keynesian logic. To fund their economy all they need to make sure is that the US remains funded, a continuous depreciation of the US debt would be akin to a stimulus package taken on by the communist regime. This ongoing imbalance can be politically justified. The US is taxing China, but China views it as a stimulus package. The best proof point is of course the current market price of treasuries. They are so in demand, the US cannot print money fast enough, figuratively. This bodes well so far as it gives the US authorities a lot of room to maneuver.

Quantitative Equilibrium aims at price stability, which, by definition of price stability means no inflation. The risk of over-shooting and degenerating into hyper-inflation exists as a probability.

When the gold bugs talk about "a return to gold" they really long for a return to sound money, where the volume of money being created, the volume of appropriation or taxation by the state is clearly known by the public, because supposedly gold is harder to debase.

Mind you, this time around the level of debasement was set by the invisible hand of the shadow banking system, and the not-so invisible hand did a mess of things. Reason? the same one that has endured for thousands of years, they printed too much money, took on too much debt. This time around, the shadow banking system printed money via debt levels, took fees on the newly created debt and did so until it exploded like a mosquito. Those that are calling for a return to gold, the gold-bugs are really calling for a return to sound money, one where the monetary levels are known throughout the system. Transparency and accountability need to be brought back to the system.

I believe we don't need gold to do that. It also seems impractical to want to do that. We have the political infrastructure to achieve just that. Debt levels were regulated at the commercial banking level after 1932, the debt levels were always deregulated in the investment banking world. The article reminds us that

A broader form of wealth confiscation capable of tapping even the poor was accomplished by currency debasement and extreme examples in ripping off everyone provoked severe social disorder. No matter what method employed, financial outrage prompted the evolution of parliament as a necessary means of constraining fiscal ambitions of the governing classes.


Barry Kelly said...

Gold-backed money is fiat money too: the value of gold depends on international markets and international supply and demand, but countries individually have local problems that, sooner or later, make it expedient to break the link. In other words, gold stops governments debasing the currency until the government finds it necessary to debase the currency.

And let's not forget that there isn't enough gold in the world to convert into current currency at current gold prices. This is another paradox: the fact that gold isn't used for currency means that there is less demand for it, which in turn means it is worth less.

Finally, fractional banking would remain the same, and financial innovation - if left unchecked - could still introduce arbitrary extra amounts of de-facto currency into the system. For example, bank notes in Scotland are promissory notes issued by a private institution, the Bank of Scotland (part of HBOS plc). Promissory notes, if they are secure and trusted, can act as an alternative currency.

Marcf said...

You are right, fractional banking remains the same no matter what. The fraction is what is legislated as part of the "monetary mass control".

Good point about gold delaying debasement, but I believe fiat debasing is on another level altogether (not that it is a good/bad thing, it is what it is). In the article they do say the dollar has been debased by 90%. You can't do that with gold. Short of finding 10 times the amount of gold that you have started with that is. I need to find a good book on what happened to spanish finance, prices and currency during the south america gold expeditions.