New School Economic Review

The problem with Money in economics

I spent yesterday at a workshop on “The Origin of Paper Money in Theory and Practice” which was thoroughly enjoyable, looking at how paper money had emerged, failed, succeeded and generally impacted people and economies in the past and today.  Some consensus seemed to emerge that ‘paper’ money – unlike money on paper, which was missing the point – could emerge privately and publicly but its successful widespread use required some systemic / macro factors to be in place: Particularly the credibility of the issuer was paramount if they were to guarantee the value of the fiat, but there also had to be a social acceptance of instability. This was an interesting point I thought, and the argument was made that we can’t forget the issue of deception, if you trust someone 100% economic logic dictates that they will try to deceive you… This was attributed to Hegel and Adam Smith’s “Deception of Nature”, and the point was that people knew there was some risk in attributing value to a fiat, and they have to  accepted this to have a widely used fiat money.

Some of the papers had stock-flow consistent models or purely theoretical models built around the quantity theory of money and similar devices and this led to some debate after the issue of a standard fiat money was raised. The argument was made that any fiat money needed a denominator, be it a price level, gold ingots, goods bundle or something which it could base its value on. I suggested that this was not the case, and there were several cases where paper money had been based on ability to pay taxes in that currency. The Maryland Dollar (1720-70)  and French Asignat (1790s) were both examples of this, and papers presented by Farley Grubb and Patrice Baubeau had earlier talked about them, so it seemed an obvious thing to say. The problem is that economists don’t like modelling, or thinking about,  money not based on a common denominator. “It feels wrong” was a comment made. The irony is that not only does it feel wrong, but in set theory, which all our economic modelling in this field is based on, it is wrong. Ben Fine has made the point in a paper well worth reading that money as a variable ‘M’ would be mathematically inconsistent if it values itself and stood as a measure of value for all other goods. Ironically that is exactly what fiat money does, and to avoid that in modelling we use M/x, where x is some denominator which, sadly, makes the money a relative price and not money at all. Funny thing money…

The USA is really big

I mean it’s economy is really big. Have a look at these very nice visualisations which make exactly that point from a GDP point of view:

Or if you’re more interested in the other ‘powerhouse’ economies of the world, consider this:

Big place and nice pictures to make that point…

You know you’re in Geneva Switzerland…

…When the public transportation is free for tourists, but it’ll cost you $60+ to drive on the highway. When the ATM asks you if you want to credit your account in Swiss Francs or your home currency, and then quotes you the exchange rates. When the UN, WTO and WIPO all have their headquarters together, and none of them sell travel adapters even when Switserland have non-EU and non-US power outlets.

All in all, it’s a very nice place, given its main attraction is a lake. That is made up for with the caliber of the people it attracts. Of all the interesting things I heard, the scariest may be the chief economist at the WTO explaining how positive it was that the debate on TRIPs had shifted from one of static rent-seeking with winners and losers, to a more nuanced picture, even if it was a matter of rent seeking originally. Hmmm…

LDC, LDC & HIPC – development lingo & definitions

I feel it’s my responsibility to notice when I am getting old and/or slow, and I think a sign is when the language of development changes under your feet. I admit not having been at the Development debate for a while – but when did LDC go from being Less Developed Country to Least Developed Country? And what does that even mean?

I noticed that the UN was talking about the North and the South two years ago, and was told that had been the lingua franca of development for a good 12 months by then. Back then, the World Bank’s HIPC – Highly Indebted Poor Countries – were the main topic of discussion, and by 2009 there were 40 countries on the list. Now it seems that the development debate is shifting to the UN, as the LDC countries are judged on 3 new criteria by the UN committee on development policy. Of course the Human Development Index is part of that indicator, as is two sets of social/structural indicators, and rather strangely, so is population size? If you have more than 75m people you can’t be an LDC, regardless of your economic situation. So that gets rid of China and India, and lets the Development debate side-step such ‘not-least’ developed countries as Bangladesh, Indonesia, Pakistan, Ethiopia, Vietnam and Egypt, probably a relief for donors and theorists. Comparing LDCs and HIPC countries seems to suggest that (thanks to the Wikipedia listings) there hasn’t been a big change in priorities:

What should we make of all this? For starters, Wikipedia must be wrong about Bangladesh, it’s too big to be an LDC, so be careful of sources. Somewhat interestingly, the new LDC countries seem to have a lot more Asian nations than the old HIPC list did. Perhaps this is a political move to focus on the rise of Asia, or more likely its a bit of realpolitik, picking Asian nations who have neighbours that have come out of the old Less Developed country Status through a variety of methods, and not Sub-Saharan nations who have had respectable growth trajectories, but are not very good at providing ’success stories’ for policy makers. Either way, I suspect that a new label will come along in five years, so don’t get too attached to these and just get your head down and try to do some good. Ahhh… Idealism

Renminbi is up 5-25 percent: What global imbalance?

There has been much complaint from the US administration that the Chinese authorities should increase the value of their currency (vis-a-vis the dollar especially), because that would help re-adjust global balances and help the world out of recession. Having been forced to exchange money today, I noticed an interesting trend: Seems to me the Renminbi has already been revalued – but by the markets.

Against the Euro and British Pound the Chinese currency is up 8.42% and 7.45% over the last 12 months, less than its heights of 18-19% in November 2009 – but it’s up. For North American currencies, who are members of NAFTA of course, the picture is even starker: Against the Mexican Peso it’s up 21.35% and a staggering 26.39% against the Canadian Dollar (rates and graph here).

If we look to China’s neighbours, the picture is the same. Japan, Taiwan and India hover around the same levels as the European nations with a 8%, 9% and 13.5% depreciation of the local currencies relative to the Renminbi over the last 12 months. Other Asian nations, and major trading partners of China have seen their local currency depreciate by North American levels: Russia (21.7%), Indonesia (30.8%) and South Korea (36.6%) are all falling against the Renminbi. (data and graph here) .

That means the renminbi has already gone up in value against all the world currencies which make up their top 10 trading partners, both for imports and exports. It is only against the US Dollar, to which the Renminbi is pegged that the exchange rate has remained constant. So what to make of the US calls for a depreciation? Clearly this is not a call for a global re-adjustment, but a domestic re-adjustment. Two questions immediately come to mind: If US lobbying efforts are succesful, what should the magnitude of a re-adjustment be? 5% like Europe or 25% like North America? Secondly, could it be that U.S. monetary policy, as far as the exchange rate goes, is no longer set in New York but in Beijing?

93% of Icelandic voters refuse to pay back loan

This morning, Icelands voters said no thank you to the compromise between their government and the Anglo-Dutch claim for recompensation after the collapse of Landsbanki and the ICEsave scheme they ran, where British and Dutch people had saved a hefty $5.3bn. Reading that back, it seems unfair that the people of Britain and the Netherlands should not be compensated, but there is a rather important detail which is missed by the usual commentary on this. This money was not saved. It was invested. The people who chose to send their money to Iceland, did so as a calculated investment decision. In the UK that happened via a savings account with Landsbanki or putting your money into bonds or ISA’s.  The return was high while the perceived risk of an ISA – promoted by tax incentives from the UK government – was low.

5%+ return and no risk... Some things are too good to be true

But then Landsbanki went bankrupt and their English and Dutch branches shut down, unable to repay deposits, the host governments went for the Icelandic government’s jugular - demanding the repayment of all UK/Dutch money held in the banks. Two things strike me: 1. If you put your money into an ISA or bond with a foreign bank, you are an investor. If the investment doesn’t pay off, you lose. Why should the Icelandic population bear the cost of your bad investment choice? (They’re already paying for their own bad choices). If anyone is wondering why the Icelandic people voted NO to a $16,400 debt per capita yesterday, I think it was not just the amount of money. It was about not re-compensating bad investment choices by relatively richer foreigners. By the way, in the UK, the minimum deposits/investments ranged from $10,000-$50,000, which investors could deposit tax free – this is not a domestic savings account for the low income person. 2: If a bank goes bankrupt, it is the host governments responsibility to insure against deposits being forfeited, even when that bank is foreign – although one would expect some guarantees to have been lodged with the central bank prior to the banking license being issued. That leaves the buck with the UK and Dutch governments, not the Icelandic one. Not a pleasant prospect in this day of growing government deficits.

That last part is where the argument is now centered. But the fact remains that a large proportion of the money lost in the Landsbanki collapse were investments into bonds and ISA’s. Investments always have some risk, and I’m sure there isn’t the same outcry of government support for those people who lost money on the Icelandic bond or stock market. Why not? Because I think we’ve confused an investment for saving. Which is an easy mistake to make, they are supposed to equal after all.

The effects of crisis on distribution

Yesterday the New School played host to a veritable who’s who of economists concerned with distribution and inequality as “The Effects of Crisis on Distribution” one-day Conference. Over the coming days I will try and get some more of the content of the conference, but with sessions attended by the UN, World Bank, and several other institutions academic and policy-oriented the session on the perceived worsening of US inequality, development and the fall-out from the crisis there was a lot on the table. [the overview is here] Well done to the conference organisers, all of them students, who have been working at this since June! Conferences take time to do, but they are well worth it. Hope you’ve all had a good nights well-deserved sleep.

Ireland or America in 2050?

Our co-editor Stephen Kinsella recently published a book called “Ireland in 2050: How we will be Living” to a lot of popular press. Now a new book by Joel Kotkin seems to have borrowed its title from Kinsella, although it takes a little longer getting to the point with “The next hundred million: America in 2050.” Going by the reviews it seems that Ireland in 2050 is the better of the two books – but I haven’t read both, so can’t compare – although by their conclusions, it seems it would be better to be living in America come my 70th birthday.

Conservatives want collectivisation

Proof that the forthcoming British elections is confusing the old dividing lines of politics as the conservative shadow chancellor (wannabe Secretary of the Treasury) has declared that public sector workers will be encouraged to form small co-operatives if they want to oust bosses and claim power for the repressed public worker. I don’t know what’s next? George W. Bush as a motivational speaker? Republicans in congress against the war?

Couldn’t happen.

How big is the government really?

I am confused. Since seeing OECD statistics to the effect that the US government represented more than 40% of GDP in 2009 (available on the linked OECD site under USA> National Accounts>…) I have also checked BEA figures and UN data which both suggest it’s around 20% in terms of expenditure as a component of GDP. I don’t really know what’s going on, but I’m pretty sure something is amiss in this empirical debate. Perhaps there’s a mistake in translating quarterly and annual figures or maybe they’re just measuring different things. Either way, it seems rather odd.

This is particularly important to get right with a view to the rising interest in the ‘Tea Parties’ which are seen as a sign that the conservative movement is on the rise. I just wonder if a new more extreme conservatism won’t simply push republican  candidates to be more radical, alienating central voters and losing republican votes in the aggregate. It’s the old 2-party vs 3-party selection problem, and we know voter preferences are not perfect when you introduce a third option into a previous two-horse race.