Macro Poll: The Dollar's Up: Is This Good Or Bad?

[Redpossum]

Precious metals are the classic alternative to a fiat currency. Personally, I don't know if they're really practical in the modern age, and I'm too old for tilting at windmills. I was just expressing my surprise that everyone who'd posted thus far seemed to be accepting fiat currencies as the only option. Usually there's at least one advocate of precious metals in any such discussion.

I do think the petrodollar is doomed, and I expect it to crash hard in the next six months to a year.

Then again, I personally think global geopolitics has entered the endgame stage, with the melting of the Arctic ice cap. And I fully expect to see entire nations hammered into the dust in the next decade, as all the old paradigms are shattered and new realities emerge from the smoke and flames. We could conceivably be headed toward events more catastrophic than anything seen since the mass extinctions at the K-PG boundary. But such things are only obvious in retrospect, and I could be completely mistaken.

 

[Matiasba]

I agree with alot of that. The problem is that governments get co-opted by powerful groups and/or individuals who impose policies that use these tools to their own benefit, to the detriment of others.

So for example, let's take Argentina in the 90s. After a series of hyper inflationary cycles (we're talking in the 2000% range-- utterly dwarfing today's 15-40%), a government was voted in that decided to peg the Peso to the dollar (thus eliminating inflation over night) and to privatise much of the economy under the guise of "getting government out of the way" in order to let the market take over. Well this worked out just dandy for some people: suddenly imports were the same price as domestic goods. This destroyed local industry which could no longer compete with imports subsidised by foreign governments, and the unemployment rose to around 25% (about 4x where it is today). This was great for a small handful of major employers because it meant that they could pay workers even less, since they were so desperate to get work anywhere.
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Of course, you can only push things so far, and by 2001, the mass of the population was in the streets, forcing out one government after another until the policies were reversed. The currency peg was removed and industry was allowed to recover. This example is not at all unique to Argentina; other countries such as South Korea, Japan in the 70s, Germany in the 50s, China now... have all shown that the best way to provide an economic environment that benefits most of their citizens is to control their own monetary policy and use it to develop their internal demand.



More directly to your question, the question of what government should and should not be able to do is a question of resource allocation. The economy as a whole and its various aspects are resources that are shared by all in common: infrastructure, an educated workforce, clean air, water, raw materials, etc. The question of how we divide those resources equitably among the population is where the idea of government comes in. It's an answer to the question: what should we do with all these things we have? The problem, as I said, is when small groups are allowed to co-opt the government and use it to further their own interests alone.

Well said. The 1990s experience is one of the reasons that explains the furious and sometimes unreasonable protectionism that we have today with the Ks. There were two big experiences, the other during the dictatorship, both being an enormous poverty factory, destroying argentinian jobs, both ended in deep crisis after a minority took the money to switzerland, more concentration, more inequality, etc.
This government, with its failures is the most pro industry we have had since Peron in the 40s, and the more to the left in Argentine history.

 

[Bajo_cero2]

If the rise is slow, it is good for economy, but if the rise is too fast is a disaster.

 

[Chet]

If the rise is slow, it is good for economy, but if the rise is too fast is a disaster.

I know a lot of current economic theory calls for a slow/steady inflation rate, usually looking to be around 2%. But the reason that is believed to be good escapes me. Why must we have inflation at all? Should not a hour of work at whatever task be worth the same amount today and tomorrow and next week? Whatever I can trade my hour of work for in terms of food/shelter should it not be the same if my work is the same, today, tomorrow, next week?
But if we have inflation always I can not save that hour and spend it next week, next week that saved hour will be worth less.
So inflation discourages saving and without saving we can not accumulate capital to invest in development of industry ..
ok, well that pretty much exhausts my understanding of economics.

 

[Redpossum]

I know a lot of current economic theory calls for a slow/steady inflation rate, usually looking to be around 2%. But the reason that is believed to be good escapes me. Why must we have inflation at all? Should not a hour of work at whatever task be worth the same amount today and tomorrow and next week? Whatever I can trade my hour of work for in terms of food/shelter should it not be the same if my work is the same, today, tomorrow, next week?
But if we have inflation always I can not save that hour and spend it next week, next week that saved hour will be worth less.
So inflation discourages saving and without saving we can not accumulate capital to invest in development of industry ..
ok, well that pretty much exhausts my understanding of economics.

Your understanding of economics is as good as that of anyone else. Clowns like Friedman have no clue WTF they're doing, as witness how messed up the results of their manipulations. He actually had the chutzpah to state that there is a natural rate of unemployment, and that governments which reduce unemployment below that natural rate cause inflation.

Perhaps the problem lies in the inherently adversarial relationship between employer and employed in a capitalist economy. The former wants to get labour as cheaply as possible, and the latter wants to receive as much pay for his/her labour as possible.

The mid-90's were the best earnings years of my working life. I worked in information systems, and the demand was high, so my colleagues and I were able to command a good wage for our labours. But the captains of silicon valley didn't want to have to pay a living wage, so they lobbied Clinton to hugely expand the H-1b visa system. This resulted in a huge influx of foreign workers, which destroyed our careers. I was replaced by a Romanian guy who barely spoke English. Of course, that's not how the H-1b system was supposed to work, but that is definitely how it did work.

And while we are on this subject, let it be noted that the H-1b visa system was horribly exploitative, being a modern equivalent of indentured servitude; the holder of an H-1b visa could not change employers. So the employer had a captive worker at a cheap rate. The employers massively increased their profits, while I/S workers were reduced to unemployment or scraps of part-time work. And that in turn contributed to the collapse of the industry in the wake of 9/11, when "the dot com bubble burst". Personally, I went from being a network admin at $40K a year to being a waiter at $15K a year. In a consumer based economy, that sort of thing damages the whole economy, because workers no longer have any money to spend. And all to fuel the greed of a privileged few with no discernible conscience.

I think this post is long enough, time to shut up about it

 

[ajoknoblauch]

After a couple of months of stagnation, the peso is finally starting to lose value against the dollar. Do you think this is a good thing or a bad thing? What are the advantages of a weak peso (e.g., more exports, more jobs)? Do they outweigh the disadvantages (e.g., imports get more expensive, lower return on fixed investments)?

More expensive imports is a moot question when they're blocked anyway.

 

[EdRooney]

I agree with Possum, Chet, I don't think youre behind the curve on economics. The problem is that there is so much misinformation out there that it's hard to stay afloat, so most people are either ill-informed or just drop out of the discussion altogether. Let me see if I can take a whack at your question though, and perhaps those who know more than I do can correct me:

Why is it good to have some inflation (eg 2%)? Because economies grow, and so the idea is to have that growth spread out equally. Growth should mean more jobs, and thus more people with more money. More money in the economy means more demand, higher demand means higher prices, and thus inflation.

Here equitable distribution of the economic growth is the key, because different economic indicators have different effects on different segments of the population. In the press we hear an awful lot about inflation and the stock market, because to the monied interests that run the media, those are the two indicators that tell them how much money theyre making. Yet you dont hear as much about the other economic indicators that are inter-related to them: net household worth (how much capital do most people have), job occupancy (what percentage of workers have jobs) or real wages (how much are people actually making) etc., even though these statistics affect most people much more than inflation or the stock market.

For example, you made a perfect point saying "[background=rgb(252, 252, 252)] Should not a hour of work at whatever task be worth the same amount today and tomorrow and next week[/background]". That question is not a question of inflation, but rather real wages. I.e., "real wages" tells you how many hours you have to work to buy the same Club Sandwich every week. The price of the sandwich can go up (inflation), but if your wages go up too, why should you care? Or even better, if wage increases are outpacing inflation, you're accumulating net wealth.

Conversely, inflation is huge for people who owe money or are owed money. If you loan me $100 straight up for 1 year in Argentina, where wages and prices are increasing by up to 40% a year, you're screwed, and I'm making out like a bandit. This is exactly the point you make about savings, and it's also why it's so connected to interest rates (the amount of money you can make by saving). So inflation is good for debtors and bad for creditors. Since banks and businesses have more sway with the press, you will thus hear more anger about inflation in the news, and less about job creation.

Make any sense?

 

[Bkentfc]

Spot on as usual roons; the only thing I would add is that is that inflation should come about as a result of market money demand and not just printing out money for the sake of it as the former would be one of the indicators of real economic growth.In terms of saving, increasing interest rates usually helps control inflation as it becomes more attractive to save rather than keep fait money in circulation.

 

[Redpossum]

Spot on as usual roons; the only thing I would add is that is that inflation should come about as a result of market money demand and not just printing out money for the sake of it as the former would be one of the indicators of real economic growth.In terms of saving, increasing interest rates usually helps control inflation as it becomes more attractive to save rather than keep fait money in circulation.

(emphasis in above quote is mine)

Bkentfc, could you explain to us, please, what the bolded part above means? I'm not pursuing the Socratic Method, I'm genuinely curious what you meant, because I don't see how that works with a fiat currency, when a non-government reserve bank simply prints money at whim. I mean, we do all realise that the Federal Reserve in the USA, (and its equivalent in virtually every other nation), is not an arm of the US government, right? Yes, I saw the part right after the bolded section, but I don't see how you isolate the two, when the bankers run the Fed.

 

[Chet]

Why is it good to have some inflation (eg 2%)? Because economies grow, and so the idea is to have that growth spread out equally. Growth should mean more jobs, and thus more people with more money. More money in the economy means more demand, higher demand means higher prices, and thus inflation.




Make any sense?

But deliberate inflation (printing more money) does not in anyway cause this equality. Anyone with a dollar saved, loses.
I also am not so sure about job creation, how can one create jobs (start a business) when saving to have the capital is difficult/penalized?
The other side is of course to borrow money but that has the problem of those with money lose if they loan it out in an inflationary environment, so why would they?
Can not the economy grow, more jobs and stuff with a steadier money supply? Inflation actually means the money is growing a lot faster than the goods/jobs.
Too much money chasing too few things.