There was a good turnout for last week's Fun Online Poll, thanks to everybody who took part. Results as follows:
How often do you wash your car?
The rain washes it - 35%
More than once a year - 25%
I don't own a car - 20%
Shortly before I want to sell it - 8%
More than once a month - 4%
Other, please specify - 7%
I must admit there was no reason for running this poll apart from me being nosey, and I'm delighted to see that I'm in the au naturel majority on this one.
I am surprised at how many respondents say they don't own a car: I'm really not sure what to make of that. Bonus points for best most inflammatory comment goes to John Pickworth: "Car washing, like ironing clothes is a waste of life."
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This week's Fun Online Poll, which may end up being superseded by events, is "How much longer will they manage to keep Greece in the Euro-zone?"
The whole thing strikes me as beyond the point of insanity - Greek's outstanding government debts is in the order of €350 billion, and they can easily afford to pay about half of that, so why on earth do the EU, IMF, ECB, EFSF whoever, need a fund of €440 billion, which They magically hope to 'leverage up' to €2,000 billion to cover the losses? Who in his right mind is going to lend a €440 fund, which is more than enough to cover the losses, another €1,560 billion, knowing that a tenth of that money will just disappear in a puff of smoke?
For sure, They also want to bail out French and German banks, and to bail out the people who lent money to the other PIIGS etc, but why subscribe to something which is guaranteed to lose you money? Unless you're investing somebody else's money and are on a decent kick back, of course? Why do They think that we will fall for this? Questions, questions...
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23 comments:
I don't see why Greece can't default and remain in the Euro, it would be no different to California reneging on their municipal bonds and then sticking with the $. It's not that I care one way or another, but the faux-lib Austrians see it as resounding proof that "fiat" doesn't work and the Euro was an inherently unstable currency due to cyclical differences within various European economies.
Imo it was nothing more than a collection of countries with the same fundamental weakness, their inability to deal with real estate vampirism effectively. It's not like Greece was an economic powerhouse when she used the Drachma!
I don't think they'll allow Greece to drop out of the Euro to be honest... No matter how bad it gets.
If one falls then who's next? I don't know the answer to that but you can be sure the markets will have a list.
Should it come to pass and Greece goes... and then another... I'll wager Germany will be next (though jumping rather than being pushed). Game over.
CD, again, fair point, I have said the same myself, I've nothing against the Euro in principle, however lofty.
But you have to remember for whose benefit the Euro was created, namely the bankers who are paid handsomely for keeping this 'project' alive - but only as long as they can earn more by keeping it alive than killing it off again.
I'm sure the chaps at Goldman Sachs etc are salivating at the fees they will be able to earn by untangling Greece.
JP, the question is, who are "They"? As wicked as the Eurocrats might be, the Goldman Sachs' of this world are far worse.
Don't get me started on the Germans, whose whole mentality is deeply schizophrenic. They have a deep seated collective fear of inflation (so want a 'strong' currency) but with the sane gusto, they want to export like mad (so want a 'weak' currency).
The only way to square this circle is to sell stuff to foreigners at a loss, there's not much more to it than that.
I agree that this mess has given the vultures a feeding opportunity of a lifetime, but when the economy is based on the exchange of gov't priviliges rather than value adding enterprise we leave ourselves vulnerable to this type of corruption.
The Euro fiasco has actually been a bit of a gift for faux-libs because it allows them to sideline housing and focus on monetarism, I'm about as anti-EU as they come but even I can't pretend that Greece et al can just default and decouple and then live in the land of milk and honey.
It doesn't really matter what currency you decide to count national economic activity in, if you're unproductive and wasteful eventually you'll run into trouble.
On what did the Greeks spend all the money they borrowed?
Car washes?
CD, I completely agree. But after defaulting, economies do tend to bounce back quite quickly, maybe Greece is the exception.
WOAR, I don't think that Greek government spending was excessive by modern standards (50% of GDP, like in the UK?), it was more the case that Greeks don't like paying tax, so the government borrowed instead of taxing.
D, fair point. I don't think it rains often enough in Greece.
Isn't it the ECB which is supposed to be "lending" the ESFSFSFSFSF the money?
Of course they (EU, IMF, ECB, EFSF) are all mainly concerned about bailing out the banks rather than Greece. And of course they are spending somebody else's money since they are unaccountable to the tax-payer and voter. So it's no surprise, the bureaucrats just want to play at being bankers. I just despair at the extinction of democracy in the "european project". Oh for the days of a flourishing Europe made up of competing states (less the wars!)
BE, on closer inspection, yes. So it's as bad as we thought, as QP explains.
If Greece had a Soveriegn currency it could default and be a customer again for Drachma loans in 12 months time, but in the Euro there are always a better credit history customer for Euro loans just across the Border, so default would have long term cosequnces for market borrowing.
If Greece were to leave the Euro there would be a preemptive run on all Greek banks as depositors and bond holders seek to stop their deposits being re-numerated in a currency worth less than the current deposit in Euros..
Maybe the Greeks could set an exchange rate for new-drachma but have a one off special exchange rate to bulk up current deposits to prevent a bank run.
That seems to be the problem.
Chefdave-
Allowing for the problem that calling people who actually understand market econimics "faux-lib"(ertarian) shows a bit of a problem dealing with reality-
the difference between the Dollar and the Euro is that the dollar is a centralised currency owned and managed by a single entity, the Federal Reserve, whereas the Euro is a kind of currency cartel. California is just a place that happens to use dollars. It does not itself need to back the dollar. If their municipal bonds default, that is likely to give them problems borrowing in the future, but that is not the same as a Euro cartel member defaulting, because the Euro cartel member is responsible for actually backing their part of the Euro. There is no "California Dollar"- just the Washington Dollar. But the Euro is a Greek Euro, a German Euro, a French Euro, etc. Thus, without a great deal of dishonest jiggerypokery, any cartel member who defaults is in practical matters dropping out of the cartel.
That is why the only practical way forward, which they are trying to do without admitting it, is to turn the Euro into a centralised currency owned exclusively in one place, Germany, like the dollar is a central currency owned exclusivley by the Fed. Which means the end of each Euro-region's pretence of independence, and the merging of Europe into a true state with not just a single currency but a single federal fiscal and political policy. The Eurostates will have to cease pretending to be "partners" and become truly subordinate to the federal centre, as in the USA.
The problem with fiat currencies is that they are backed by nothing. They are entirely dependent on "confidence". In the Euro, that confidence is maintained by all the States. If one defaults, the Euro in general loses confidence. The only way around that is as I said above, abolishing the States so a single State is the guarantor of confidence.
Den, fair summary.
IanB: "But the Euro is a Greek Euro, a German Euro, a French Euro, etc. Thus, without a great deal of dishonest jiggerypokery, any cartel member who defaults is in practical matters dropping out of the cartel."
Also, a fair summary. But think about it, Greece (the government) only backs its own debts and not those of the banks. Even if Greece (the country) were to walk out, then those Greek people whose debts are denominated in EUR and those people whose bank deposits are denominated in EUR will have to fight it out between themselves.
The problems with fiat currencies are that
a) they work incredibly much better in practice than they do in theory,
b) they are not backed by 'nothing' they are backed by future tax revenues or future mortgage payments, and
c) money reformers, Faux Libs and Socialists alike always blather on about 'fiat currencies' without appreciating that they work surprisingly well. There's nothing that can't be made to work better, of course.
And in any event, I'd consider ChedD very much to be a free market economist who understands and rather likes free market economics.
Mark, any unstable scheme (such as the cliched Ponzi) seems to work well until it hits the wall. Indeed, during that phase a Ponzi seems to be working far better than other forms of investment.
The central problem with the combination of fiat, central banking, fractional reserve and borrowing-financed government is that it requires a continual inflational increase in the money supply in order to function. It is the fiat part that allows that. With a fractional reserve system as well, that leads to an exponentially inflating quantity of debt (M2, M3 etc), the repayments on which need to be serviced by M0. The system treats the M2+ as actual money, when it is actually just a claim on debt, because it makes the error we were talking about before, of considering mere valuations (the value of an owed sum) to be actual value.
The result is that the imputed value of the debt mountain far outstrips the actual realisable value in the marketplace, and eventually somebody realises this- that the debt can never all be repaid- and a crash occurs. So then they start inflating M0 madly again ("QE") to try to pay off the last debt mountain- and that creates another even bigger bubble of debt, and the next crash is even bigger.
We have had global fiat for about 40 years, since Nixon abandoned the gold standard. We now appear to be in the end game of it. Nobody can say how long a particular fiat/central bank/frac reserve/insolvent government system will last, but its failure is an economic inevitability, like the cliched Ponzi scheme.
Or, to put it another way, and to answer your point (b)
b) they are not backed by 'nothing' they are backed by future tax revenues or future mortgage payments
You cannot back a currency with itself. That is the same as backing it with nothing, in different terminology.
Also, I don't know much about ChefDave personally, but anyone dismissing "faux-lib Austrians" seems to be saying he doesn't understand free market economics at all, especially as he appears to be cleaving to some kind of Ricardian inspired nonsense about "real estate vampirism" as a Theory Of Everything.
IanB: "You cannot back a currency with itself. That is the same as backing it with nothing, in different terminology."
Where did I say that you could back a currency with itself? Are we off down the boring old route where you lecture me on what I think, despite I know much better what I think?
Returning to the issue in hand:
If I borrow money, I owe somebody money, that money is backed by my willingness and ability to repay the debt.
If a government borrows (or prints, whatever) money, that money is backed by the government's willingness to repay the debt and its ability to collect taxes to pay it.
In neither case is the money backed by 'nothing'. It might well be backed by 'not enough' but not 'nothing.
As you well know, "Faux Lib" is a term coined by CD (and used by me) to denote the intellectual wing of the Home-Owner-Ist movement, which sees the government as purely there to support the interests of land owners, and who are quite happy for the interests of savers of money to be shat on, on the basis "we told you so". The interests of "the people" or "the economy" in general do not rank at all in the Faux Lib/Home-Owner-Ist spectrum.
e.g. the government raises £1m by selling of land - then the land owner must be protected by The State at all costs; the government raises £1m by borrowing the savings of people who want to put a bit of money away can f- off, it's OK for The State to default on money obligations, but not to default on the obligation to preserve the value of the land it has sold off.
You cannot back a currency with itself. That is the same as backing it with nothing, in different terminology.
Ultimately, the value of all currency (gold included) is, and indeed can only ever be, backed by productivity. Things that are most useful as passive exchange tokens are only valuable as long as there is something to exchange them *for*. I'm on the hunt for a monetary theory that actually acknowledges this with any rigor. Everything I've seen so far doesn't.
IanB, you say "that leads to an exponentially inflating quantity of debt (M2, M3 etc), the repayments on which need to be serviced by M0."
I really don't get that. Who says the repayments need to be serviced by M0 (notes and coin)?
Once the money is created, there is no difference between M0 money and M anything else money. It's all money, and all money is debt anyway (which is another way of saying what Mark said about backing it with future tax revenues).
There is no reason why a "fiat currency" system with fractional reserve banking requires an ever inflating money supply. That depends on decisions made by government.
Gold has no intrinsic value (except in its relatively limited uses for jewellery, semiconductor chips etc). Its use as a store of value comes only from people's willingness to accept it in exchange for things that other people need, e.g. food, clothes, houses or whatever.
In short, there is not such a big difference between "fiat" money and gold standard money as people say there is.
F: "Ultimately, the value of all currency (gold included) is, and indeed can only ever be, backed by productivity."
Or the value or price of anything, really. And as long as that is a free exchange without market/political monopoly power being exercised, then it's not much to worry about.
AC, splendid retort, thanks.
Adam Collyer-
I really don't get that. Who says the repayments need to be serviced by M0 (notes and coin)?
M0 is the actual base money, not just notes and coin. It is reserves, notes and coin. That's the point. Transactions have to be covered by some M0, that is why a bank run wipes it out, because they have to have enough M0 on hand to satisfy the demand, but the demand is equal to M0*the fractional reserve multiplier.
M1(2,3) can act as money temporarily, but eventually have to be converted to M0. If Mark owes me £10,000, you might take my IOU from Mark in payment of £10,000 of goods (this is M1+ acting as money). But at some point, you're going to want to get the actual money, and that has to be M0. The other M's are all debts, not money (the currency) itself.
I said-
There is no reason why a "fiat currency" system with fractional reserve banking requires an ever inflating money supply. That depends on decisions made by government.
I said-
the combination of fiat, central banking, fractional reserve and borrowing-financed government.
You can have a stable fiat, but to get one you need no central bank and no (persistent) government borrowing. That's what spirals it out of control.
There is an enormous difference between gold and fiat. Gold is generally valuable as a commodity in its own right. Paper with a picture of the queen on isn't. This is what Mark isn't understanding (as usual) about "backing". The government doesn't need to declare gold to be currency to make it valuable. Gold *is* valuable (in most circumstances, not always, subjective value and all that). Fiat currency isn't valuable to anyone until the government declare it to be legal tender. Hence, it is not backed by anything else, whereas a gold standard (or other commodity standard) paper currency is backed by the gold, which is valuable regardless of what the government says or does.
So, now I'm puzzling over why Mark seems to be so keen to support fiat currency. Me, I'm no particular goldbug, but I oppose fiat because governments can't be trusted with it. But Mark seems positively keen.
I can only suspect that admitting that fiat/central banking/fractional reserve/inflationary policy is the primary driver of property price inflation would blow his Ricardian theory of intrinsic land value out of the water, so he just can't countenance that.
Sorry, forgot to add that while you can have a stable fiat, it is virtually impossible for one to arise in the free market, precisely because it is just bits of paper. You need government legal tender laws to achor it. Without those, those bits of paper have to be ultimately converted into a tangible commodity to obtain value. So it's very hard in a free money system to persuade people to start accepting bits of paper that aren't backed by being convertible into some commodity. Because they are just bits of paper.
IanB: "I'm puzzling over why Mark seems to be so keen to support fiat currency."
It's so nice of you to drop in hear, demonstrate clearly that you don't understand the monetary system (or even the concept of 'barter and exchange' for that matter), decide that you find it wholly lacking and then round things off by TELLING ME that I am an idiot for supporting it. May I repeat for the thousandth time "I NEVER SAID THAT"?
Do you actually have any concept of "good manners" or "friendly debate" or "good natured disagreement" or anything? I really am going to have to start deleting your comments if you go on like this.
IanB: "I can only suspect that admitting that fiat/central banking/fractional reserve/inflationary policy is the primary driver of property price inflation would blow his Ricardian theory of intrinsic land value out of the water, so he just can't countenance that."
As ever, you are doing a strawman and betraying a lack of understanding of LVT.
1. LVT is a tax on relative rental values and not on "prices".
2. Rental values are fairly stable, and some areas clearly command higher rents than others. If you deny this then there is no hope for you. This has little to do with selling prices, because easy credit etc. has practically no effect on rental values.
3. In real life, not in the Faux Lib fantasy world, actual rental values only increased by (say) 50% between mid 1990s and peak of bubble, i.e. in line with GDP growth generally. But house prices trebled.
4. Banks can push up selling prices as high as they like with easy credit (and all the other things that we agree are bad about the banking system), but they need to have a net privatised rental value to start with.
5. The selling prices are merely a multiple of privatised rental values. So if the amount of privately collected rent is reduced (via LVT), the banks can grant easy credit as much as they like, and the size of the credit bubble/house price bubble will be much smaller in relative or absolute terms.
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