How the World's Richest Governments Starve the World's Poorest People
Contemplating the grotesque potential side effects of bioethanol subsidies in the world's most developed economies is almost unbearable. While everyone is affected by higher food prices, for some people they mean only giving up a new pair of shoes or a night out. For others, however, the more costly food puts their very subsistence into question. No doubt, the politicians who came up with the idea of subsidizing the diversion of grain to the production of bioethanol did not intend to starve the world's poorest people; but the fact that the consequences were unintended does not absolve them of responsibility. FULL ARTICLE
Comments (64)
I have a hard time believing that ethanol production has caused the high prices of food. I don’t know what Europe uses, but the US makes ethanol from corn, whereas the prices of wheat, rice and other food has increased. And the corn used for ethanol is not corn used for human consumption. There are a lot of varieties of corn. Most of the world eats white corn. Most corn raised in the US is yellow corn for animal feed. I would think that cattle and hogs would be starving, not humans. Brazil uses sugar cane for ethanol. No one uses rice or wheat, except for making alcohol for human consumption.
I would rather place the blame on monetary inflation, especially that in the US, Japan and Europe since those currencies are used as bank reserves in the rest of the world.
Published: May 28, 2008 9:31 AM
fundamentalist:
I've kind of thought it is reasonable to assume ethanol subsidies increase food prices:
-Farmers grow more corn instead of other types of plants because of ethanol.
-Supply decreases for these other crops.
-Prices of those crops rise.
Published: May 28, 2008 9:57 AM
aren't the farmers to blame then? greedy capitalist bastards. how dare they try to profit to feed their families.
Published: May 28, 2008 10:12 AM
Estimates are that greater than 25% of production of other crops have been diverted into corn production. Some estimates are that ethanol production has directly raised the cost of food worldwide by 3% but has raised the price of corn by 33%.
Cattle, hogs, and chickens are increasing in cost due to an increase in feed costs. Not all residual costs are included in the ethanol analysis.
Yes, inflation is a serious problem with food and most here are not at all surprised, but our congress has callously added the burning of our food supply to the stresses of feeding the world.
But are we surprised when during the Great Depression FDR had crops plowed under and animals killed to keep prices from falling while people in the cities were starving.
When it comes to getting reelected what is a starving child or two?!
Published: May 28, 2008 10:14 AM
Fephisto: "Farmers grow more corn instead of other types of plants because of ethanol."
That makes sense to some degree. Does anyone know what Europeans grow for ethanol production?
I could see farmers switching from wheat to corn, but not rice to corn. And switching to wheat from corn is a major expense for farmers because the planting and harvesting equipment are very expensive and very specific; you can't use a wheat drill to plant corn, nor a combine to harvest corn. But it happens I guess. It seems more likely that farmers would switch from white corn to yellow corn, but they would do that only if yellow corn is selling for more than white corn. White corn would sell for less if other countries restrict imports of white corn, as Mexico does.
Published: May 28, 2008 11:08 AM
Bogdan
Food is Power.
We use it to change behavior.
Some may call that bribery.
We do not apologize.
Catherine Bertini The United Nations
After reading your article it is clear to me that you are parroting what you are told.
If you really want to understand, then maybe you should read the following:
The First Global Revolution by The Club of Rome
http://documents.scribd.com/docs/166bpsie7cp5os18r4z1.pdf
and this one
The Next Million Years by Charles Galton Darwin
http://www.scribd.com/doc/210040/Darwin-The-Next-Million-Years-how-to-kill-off-excess-population-1953
But seeing as you work for a think tank, then you must answer your own consciousness as you watch millions die. I am sure you already know all this. If I am wrong, accept my apologies.
Published: May 28, 2008 11:11 AM
What?
Are you saying that the US may be trying to cut down on the scores of US food-aid programs aimed at giving away food/grain/legumes/meat/poultry/dairy products to the world's hungry? Are you saying that it would result in worldwide starvation? So now, suddenly, the US's role in helping a hungry world is being thrust into the limelight after almost a century of belegerent freeloading. And the cause of the limelight is because the US is seen as witholding the food that the starving millions and their god-forsaken governments see it as their god given right to demand from us? And what gives them that right? The fact that they are starving.
I have to be my brother's keeper and I also have to be prepared to be slapped in the face by that same brother, viz Burma.
Published: May 28, 2008 11:30 AM
In Europe, I believe, wheat is used to produce ethanol. We also use colza to produce diesel fuel (almost half of passenger cars run on diesel).
Published: May 28, 2008 11:34 AM
ironic that the proposed us farm bill should include $30 bn incentive payments to farmers that idle land.
Published: May 28, 2008 11:36 AM
Well strike another blow for freedom and the power of force on the market place. The problem is simple. The Western World has an artificial stimulus, Bush, Blair and other cheif executives are giving away money, to farmers to grow corn to be made into ethanol and to consumers of petrol to use ethanol. So farmers in other places who can switch to growing corn do so and others who grow food for poor people end up growing it for rich folks like those pointlessly using ethanol that costs more than petrol to fuel vehicles.
The most ironic part of this is that not only is ethanol more expensive than petrol, it does not have other usese like plastics or lubrication AND it takes a lot of petrol to produce the ethanol.
The best solution is to drop ethanol supports and all agriculture supports and stop supporting petrol prices and let markets do their work.
Published: May 28, 2008 11:42 AM
I'm having a hard time being convinced that ethanol production is increasing food prices to the extent we see. Thinking in terms of incentive, it's more likely that commodities seem like a safer bet than the financial markets or any other market right now. It makes you wonder; government creates policies and then big money takes advantage of those policies, hmmm.
Published: May 28, 2008 11:45 AM
newson:
Just to give anecdotal evidence to your comment, I have a brother-in-law who lives in northern Kansas and is a great resource for information. He owns a feed lot, lots of land in the county and his ethanol plant went into production last year. 2 july 4ths ago when our family went to his house in Kansas, the field that you drive by getting to his house was all overgrown. He says it's going to stay that way as long as the government's going to pay him.
He doesn't need the money; it's not even a consideration. This policy is only for one thing: Keep food prices high.
Published: May 28, 2008 12:00 PM
All nations create starvation and poverty by the transfer and destruction of wealth through fiat currency. This needs to be addressed before we discuss secondary causes. As Austrian economists we should stay focused on our theory of money as liberation in every sense of the word. Give the world honest money and the market will take care of the rest.
Published: May 28, 2008 12:41 PM
The government must protect the rights of the individual property owners or people starve. Its a sad yet simple truth.
Would you borrow to buy seed, plant it, tend it, pay the costs of weeding, fertilizing, irrigation and harvesting, if there is no reasonable assumption you will even get your investment back? Include the tax on that land, whether it produces or not.
In Haiti, food production is stalled by the tragedy of the commons which denies the investor their harvest. The field will be overrun when the crop is even partially ripened. So the fields lie fallow and people die.
A potato farmer in Idaho doesn't raise potatoes to supply a deli in NYC, yet the market provides both the buyer and seller that option. If the government adds a bonus to the potato farmer to raise corn, the system gets short-circuited.
Central planning/Socialism/Statism cannot better design, or even duplicate, such a complicated system as a free market and it is hubris to think it can.
Published: May 28, 2008 1:20 PM
fundamentalist,
A few years ago government subsidies made soybeans a better cash crop than corn and so soybean production pushed out corn production. Now with the government creating a huge market for corn by law (a market that is mandated to increase by law) corn is pushing out soybeans as a cash crop.
The problem is that government is distorting the market and the result is unintended consequences. The goal of congress is not to starve others in the world it is just the result of their central planning mistakes.
Don, fiat currencies to facilitate debasement by the government, but do not be fooled. Businesses can deal with currency fluctuations through hedging transactions. The biggest problem we have is when congress distorts markets by subsidy or regulation. Yes, we need to deal with the monetary mistakes, but that does not mean that we do not need to deal with the fiscal mistakes also.
The Great Depression was the failure of central planning not a monetary mistake. The food lines were not because of a shortage of food but because of government restrictions on food production.
Published: May 28, 2008 1:40 PM
Don Duncan
You took the words right out of my mouth. Well said.
Published: May 28, 2008 2:00 PM
Don Duncan:
"All nations create starvation and poverty by the transfer and destruction of wealth through fiat currency. "
The US dollar is not fiat currency, and neither is any other country's money. The Fed only issues a new dollar to someone who offers a dollar's worth of bonds or other items in exchange. I suppose you equate the Fed with a counterfeiter, but a counterfeiter does not stand ready to buy back the dollars he issued, whereas the Fed does exactly that.
Published: May 28, 2008 7:42 PM
--
The best solution is to drop ethanol supports and all agriculture supports and stop supporting petrol prices and let markets do their work.
--
And tax the crap out of petrol. It's stupid to believe that an oil industry executive will be thinking past the next few years of stock option bonuses. There's simply no incentive to plan for the future
Ethanol supports are business-friendly initiatives dreamed up by conservatives to deflect criticism over their inaction on climate change.
Published: May 28, 2008 7:47 PM
Nah, I with EnEm. The world's poor are poor because they don't produce not because of what the West is doing. The poor don't have any claims on what the West should be doing with their food. Likewise the supermarket has no duty to feed me - they charge a price and it's up to me to be able to pay it or not. On the other hand, what if ethanol was profitable? This time the farmers would be in good concious in growing food for fuel knowing their not using subsidies and the land still competes with food crops and still raises prices. Invariably it's like comparing the famine in Zimbabwe versus the food surpluses of Rhodesia as proof of incompetence in key areas.
Published: May 28, 2008 7:51 PM
One of the things that makes poor people poor these days is that so many of them have been separated from their own subsistence resources. These days, they have to get cash to buy food from other people. It used to be that they had patches of their own land or got paid partly in kind they could use for working in the rural sector; not so much now. They often still have some of those resources, which is how they could survive "on" US$1 per day, because it is actually with US$1 per day as a top up wage - but they still need that cash and now it doesn't stretch far enough for a lot of people who used to be able to get by.
Mike Sproul, all those things you describe as backing the dollar are only moving things one level further back. Once you track everything to the point where the buck (literally) stops, you find there is only one thing the US government itself does to back its currency directly: it accepts it in payment for taxes. Add in the indirect stuff whereby it insists that other people accept US$ in payment for debt or forfeit all claims (even for restitution of what was provided to incur the debt), and what you have is just precisely a fiat currency - because the government says so. Either it says pay taxes or else, or it says take US$ or else, but that is what it is doing.
Published: May 28, 2008 9:12 PM
DITTO MR. DUNCAN. mr. sproul holds to a theory that does not hold water. Anyone have up to date US money supply numbers...?
Published: May 28, 2008 9:23 PM
mike sproul says:
"I suppose you equate the Fed with a counterfeiter, but a counterfeiter does not stand ready to buy back the dollars he issued, whereas the Fed does exactly that."
except that this is not the case. the fed will not exchange its notes for the treasury securities on its balance sheet. the currency is irredeemable.
Published: May 28, 2008 10:35 PM
PM Lawrence:
"there is only one thing the US government itself does to back its currency directly: it accepts it in payment for taxes."
A dollar can be backed by the issuer's promise to give you something for it, or by the issuer's promise not to take away something in lieu of it. The tax backing you describe falls in the second case. It is the government's ability to collect taxes that backs the dollar, and if the government lost that ability, the dollar would lose value. In the same way, a privately-issued bank note might be backed by the bank's ability to pay out silver, and if the bank lost that ability, its dollars would lose value. In either case, the dollar is backed. Fiat money is money without backing. The dollar does not fit that description.
Newson:
"the fed will not exchange its notes for the treasury securities on its balance sheet. the currency is irredeemable."
Of course it does. It's called an open-market sale of bonds by the Fed, and when it happens, the Fed redeems paper dollars for the bonds it holds.
Published: May 28, 2008 11:08 PM
Article:
"No doubt, the politicians who came up with the idea of subsidizing the diversion of grain to the production of bioethanol did not intend to starve the world's poorest people"
Are you sure about that...isn't that what environmentalism is all about?
---
Sproul:
"Of course it does. It's called an open-market sale of bonds by the Fed, and when it happens, the Fed redeems paper dollars for the bonds it holds."
The crap ($) that the fed emits is swapped with the crap (TB$) that the treasury emits.
In your eyes the swapping of crap creates some sort of value. Swapping virtually identical IOUs does not create wealth on either side. No backing exists. The Dollar is fiat. Get over it.
Published: May 28, 2008 11:44 PM
Without wanting to take any heat off the governments of the west, it would be interesting to see how much difference it would make in Africa if Zimbabwe returned to the pre-Mugabe level of grain production.
We should also check the extent of price control in the developing world which reduces the incentive for the farmers to produce a surplus for the market.
Published: May 28, 2008 11:59 PM
But do tell how the West is obligated to feed the Third World? The current argument is rather similar 'think of the poor blacksmiths who'll be out of job if we make the transition to motor vehicles'. The Third World has always had trouble feeding themselves even in the era of cheap oil despite the fact that many of them are sitting on fertile soil.
Published: May 29, 2008 12:57 AM
Mike Sproul wrote "Fiat money is money without backing. The dollar does not fit that description.", on the grounds that taxes are backing.
We disagree on definitions. In my book, taxes are themselves an example of "the government says so"; sure, they are "backed" by the threat of force, but the same applies for any other definition of a fiat currency. Under my definitions any backing that comes under the heading of "the government says so" makes it a fiat currency, unless there is some other backing that doesn't in the end come down to something the government itself insists on. Non-fiat backing could be, e.g., bullion, other currencies that are not themselves fiat currencies, or sales of assets such as land that aren't themselves fiat backed (thus, no backing by sales of bonds etc.).
Published: May 29, 2008 1:46 AM
Sorry, Bogdan, but I disagree with your thesis, which you have come nowhere close to establishing.
Certainly wealthy corporations and farmers have been adeptly manipulating their governments to obtain benefits (price supports, subsidies and import duties) rather than simply responding to market forces - see the Economists' "Harvest of Shame" story, http://www.economist.com/displayStory.cfm?source=hptextfeature&story_id=11412562, and this commentary, http://www.stockhouse.com/Blogs/ViewDetailedPost.aspx?p=75270 - and such manipulations have some impact on the world markets, and all of that richly deserves criticism, BUT the governments of developing countries remain entirely responsible for their own economic mismanagement that has stifled domestic production, failed to protect propoerty or encourage capital formation and kept their peoples poor. Is that also a problem that we should pay attention to? Sure, but blame shifting to the West is simply a recipe for more irresponsibility by ruling elites in poorer nations.
Published: May 29, 2008 1:49 AM
Strangely, the Mises Institute has chosen to publish this article that is, as far as I understand it, utterly non-Austrian, yes, even anti-Austrian, in its undrelying premises. What`s going on?
Published: May 29, 2008 3:11 AM
Strangely, the Mises Institute has chosen to publish this article that is, as far as I understand it, utterly non-Austrian, yes, even anti-Austrian, in its undrelying premises. What`s going on?
Published: May 29, 2008 3:13 AM
There are lots of government interventions that causes these price hikes but the most significant is the global inflation.
Because of the central bank inflation in the world, led by the FED, limited resources were malinvested.
The cover of the economist this week (may 24th) has a drawing that has men talking. One says "food pries are up", the other "oil prices up", another "it seems the price of everything is up" and the last guy says "except my house price".
This is rather crude but because of the distortion of the price signals, limited resources were invested on houses (and many more useless things like military hardware) rather than essential stuff that people really need like food and oil production.
And now the price signals are rather louder.
Published: May 29, 2008 3:57 AM
Corn, wheat and rice are the "big 3" global grains. Two years ago the US ethanol from corn program raised the price of corn so much there were riots over tortilla prices in Mexico.
As people espousing the bankrupt dogma of neo-classical economic dogma, you above all people should understand substitution.
The oil price and food are intimately linked, not only through boondoggles such as the US ethanol fiasco, a barely hidden subsidy to Mid-West farmers to vote GOP, but through petroleum based fertilizer, pesticide and diesel costs of production.
Besides, referring back to so called price theory, ethanol is meant to be a substitute for gasoline (it isn't - see below) - you should expect ethanol production; and understand why the prices of the 3 grains go up in unison.
1 barrel of corn ethanol has 61% the energy (in joules) that a barrel of oil has. In addition it takes 1 barrel of oil to make 1.2 barrels of oil equivalent of ethanol. It cannot be transported in pipelines and must be mixed with gasoline shortly before sold retail. Additionally it cannot scale. I suppose you could at a stretch claim it is a substitute, if so, it is a very poor substitute for gasoline.
Sorry, but Peak Oil is looking a whole lot better than price theory (the part that claims high prices "create" more oil anyway).
Published: May 29, 2008 5:32 AM
Saildog: "Sorry, but Peak Oil is looking a whole lot better than price theory (the part that claims high prices "create" more oil anyway)."
High prices reduce consumption while providing incentives to increase production. If greater production is not possible, consumption will continue to decrease while producers attempt to bring substitutes to market. A lot of the Peak Oil crowd seems to misunderstand these claims and labels economists as "cornucopian".
Nothing is assured. The market might fail horribly at the task we require of it and allow the death of billions, but it is THE BEST OPTION available for avoiding such a tragedy.
Maru: "Strangely, the Mises Institute has chosen to publish this article that is, as far as I understand it, utterly non-Austrian, yes, even anti-Austrian, in its undrelying premises. What`s going on?"
I'm not sure where you see a contradiction. Government intervenes in market, unintended consquences follow. It's a classic Austrian analysis.
Published: May 29, 2008 8:39 AM
PM Lawrence:
"Under my definitions any backing that comes under the heading of "the government says so" makes it a fiat currency, unless there is some other backing that doesn't in the end come down to something the government itself insists on. Non-fiat backing could be, e.g., bullion,"
The Fed's balance sheet shows a substantial amount of gold, so that would fit your definition of backing. And what about all the assets that banks are able to keep only because robbers face the threat of force--i.e., because the government says so?
That aside, if the fed has issued $700B, backed only (as you say) by the government's threat of force, then what happens if the fed issues another $100B and buys British government bonds with it? The real bills answer is that the fed's assets rise in step with the issue of dollars, so there is no change in the value of the dollar. I'm not sure what your answer would be.
Published: May 29, 2008 9:08 AM
"the fed will not exchange its notes for the treasury securities on its balance sheet. the currency is irredeemable."
to which mike sproul says:
"Of course it does. It's called an open-market sale of bonds by the Fed, and when it happens, the Fed redeems paper dollars for the bonds it holds."
i apologize for not being clearer: you're quite right that one can use dollars to purchase treasuries via open market, but this is meaningless. as xexix rightly says, dollars buy paper denominated in dollars. the argument is circular. i should have said that the beauty of redeemability is precisely being able to convert dollars via a fixed ratio to some commodity or asset whose stock is essentially fixed.
treasuries' supply is limited only by politicians' fiscal restraint. from memory, the fed has less than 1% of its balance sheet in gold.
having read your papers, i still can find no rbd rationalization for the fed. this is where i think the austrians make particular sense. the inherent flaws of the f.r. system must necessarily argue for bank consolidation and centralization, to avoid bank runs. the risk then becomes systemic. and that is the point i think we are at now.
Published: May 29, 2008 10:04 AM
Mike Sproul,
Fiat means spoken into existence. Fiat money is money that is spoken into value usually by the government. Because the US dollar has no value except that spoken into existence by the federal government it is fiat money.
Mises recognizes three kinds of money: Commodity Money, Credit Money, and Fiat Money. Obviously the US$ is neither commodity money nor credit money. That only leaves one choice.
If you disagree would you please tell us in which class you would put the US$?
Published: May 29, 2008 3:21 PM
The Fed's balance sheet shows a substantial amount of gold, so that would fit your definition of backing.
So the Fed will buy back my dollars with gold? That'd be great!
Published: May 29, 2008 5:00 PM
Newson:
"dollars buy paper denominated in dollars. the argument is circular."
Most of those dollars were created as the fed bought bonds, and they can be retired as the fed sells bonds. By analogy, GM can print new shares of GM stock and use them to buy call options on GM, which were issued by merrill lynch. GM''s assets will rise in step with its liabilities, so the price of GM stock will be unaffected. But the new shares of GM are backed by calls which are themselves denominated in GM stock, and those shares could be retired if GM used its calls to buy back shares. This case has the same 'circularity' that you referred to, but it still works.
" the fed has less than 1% of its balance sheet in gold."
It's closer to 20%, according to the fed's balance sheet.
"having read your papers, i still can find no rbd rationalization for the fed. this is where i think the austrians make particular sense. the inherent flaws of the f.r. system must necessarily argue for bank consolidation and centralization, to avoid bank runs."
The rbd doesn't say there should be a fed, it just says how to run it if you insist on having one. The rbd says that the only way to avoid bank runs is to have adequate backing for money, but it says nothing about whether consolidation would facilitate adequate backing--no reason why it should.
Dick Fox:
"please tell us in which class you would put the US$?"
The dollar is credit money. The only reason economists concocted the crazy idea of fiat money is that they couldn't explain why the dollar had value when you couldn't take it down to the fed and get gold for it. Prior to 1933 you could do that, so I think every austrian would have called the dollar credit money, and would have agreed that it was backed by the gold and bonds held by the fed. After 1933 convertibility was suspended, but the assets were still there, so did the dollar suddenly become fiat money? Even before 1933, the dollar became inconvertible every night and every weekend. A two-day suspension didn't make it fiat money, so why the belief that the indefinite suspension of 1933 made the dollar suddenly become fiat money?
You have to recognize that convertibility can be instant or delayed, free or costly, certain or uncertain, physical or financial. Before 1933 the dollar was physically convertible. Since 1933, it has been financially convertible.
Now, if some superior money substitute came along, and people stopped wanting to hold paper dollars, then the fed could sell off its bonds and soak up all the unwanted dollars, without ever paying out gold. If it happened that the bonds were all sold off, leaving only the fed's gold, then at that point, physical convertibility would start to matter, and I expect the fed would start handing out gold for dollars. But until that day comes, physical convertibility is not necessary. Unfortunately, this situation makes people think the dollar is unbacked, when it is actually backed but physically inconvertible. The quantity theory gets this completely wrong, while the real bills doctrine gets it right.
Published: May 29, 2008 5:21 PM
mike sproul says:
"By analogy, GM can print new shares of GM stock and use them to buy call options on GM, which were issued by merrill lynch. GM''s assets will rise in step with its liabilities, so the price of GM stock will be unaffected."
first, to buy gm calls from merrill lynch would require dollars, not gm scrip.
second, the exercise you describe would be a net value destroyer, because gm would be losing money on the wasting time premiums. the call option seller would be pocketing this.
finally, bank runs have always accompanied rbd experiments. the fed is an attempt to obviate this flaw, but at the cost of turning isolated crises into systemic collapse.
Published: May 29, 2008 9:28 PM
Mike Sproul, as Michael A. Clem implied, the fact that the USA has some gold does not make the US$ gold backed; that would only be the case if you could get gold out in return for US$ at your own option, with no problems turning up from lack of gold. In the 19th century they used your trick of selling bonds to bring gold into countries that were running short, but it doesn't work to stop a fiat currency being a fiat currency.
It is certainly true that "if the fed has issued $700B, backed only (as you say) by the government's threat of force, then what happens if the fed issues another $100B and buys British government bonds with it? The real bills answer is that the fed's assets rise in step with the issue of dollars, so there is no change in the value of the dollar", apart from one crucial thing: those "assets" are not "real bills", bills which deliver real goods and services in the short term. The US$ value would indeed be held higher while the trick lasted, but only by spreading the "fiat" part, not by hooking up to any separate backing. You might just as well argue (as you have) that if a government can prop up a fiat currency's value with taxes, it isn't a fiat currency. But the test isn't whether it can be given value, only whether it lacks value independent of government action.
What would work, but hasn't actually happened with the US$, is the trick the Dutch used in the East Indies, setting up a fiat currency (in their case, only part fiat) and using that to develop separate underpinning assets. Once that has happened, it stops being a fiat currency.
You might like to look at fiat currency.
Published: May 30, 2008 2:09 AM
Mike Sproul -
How do you stop an RBD-currency financing a credit bubble?
Suppose that a currency is set up on RBD principles, and that there is no constraint on money creation by banks, except the basic requirement of adequate collateral for loans.
Then suppose that there is a rapidly appreciating asset or asset-class. Everyone wants to buy into this asset; they use new money to bid up the price, and then once their acquisition has appreciated enough they use it as collateral to borrow money to buy more of the asset-class. It is sufficiently obvious that money-creation and asset-appreciation will chase each other up a credit bubble. Positive feedback will turn what would have been a short-lived appreciation into a whopping bubble. When the bubble bursts, the debtors declare bankruptcy and the bank is left with worthless collateral.
How would the RBD stop this? Were the banks too loose in their lending criteria? Even a 25% deposit is not conservative enough if the asset is, say, doubling in price every few months, prior to its collapse.
Published: May 30, 2008 9:59 AM
" the fed has less than 1% of its balance sheet in gold."
mike sproul:
"It's closer to 20%, according to the fed's balance sheet."
touche, - my memory playing tricks - the fed's gold is worth about 1% of m3, not the fed's balance sheet.
speaking of which, any idea why they persist with the $42oz official valuation?
Published: May 30, 2008 11:40 AM
Newson:
"first, to buy gm calls from merrill lynch would require dollars, not gm scrip."
GM could hand newly-issued shares to M-L in exchange for calls, or GM could sell new shares to the public for dollars and use the dollars to buy calls from M-L. Either way the result is the same: GM stock holds its value, and is backed by assets denominated in GM stock. Circular? yes. Unworkable? no.
" the exercise you describe would be a net value destroyer, because gm would be losing money on the wasting time premiums. the call option seller would be pocketing this."
Beside the point. This is just to illustrate the possibility of backing a security with other securities denominated in that security. If you don't like calls, let GM buy hypothecated shares of GM issued by M-L. They aren't a wasting asset.
"finally, bank runs have always accompanied rbd experiments."
Bank runs have accompanied all efforts at banking, including 100% reserve banks. They are not unique to real-bills regimes
PM Lawrence:
"the fact that the USA has some gold does not make the US$ gold backed; that would only be the case if you could get gold out in return for US$ at your own option, with no problems turning up from lack of gold."
As I said, there is more than one kind of convertibility. Delayed convertibility can work as well as instant converibility, and financial convertibility can work as well as physical convertibility. What really matters is that the issuing bank has sufficient assets to buy back the money it has issued. If you could find any institution that ever existed that did NOT hold assets against the money it had issued, then that would be a case of fiat money. I often wonder how quantity theorists can see the plain fact that all banks hold assets against the currency they issue, and still insist that the currency is not backed by those assets. If that were true, then you should see at least a few central banks that hold no assets against their money, but you don't.
"those "assets" are not "real bills", bills which deliver real goods and services in the short term. "
That, unfortunately, is the mainstream view of the rbd, so I can't blame you for echoing it. The correct view of the rbd is usually called the backing view of the rbd, which holds that it is irrelevant whether money is issued for 'productive' purposes or not. All that matters is that the new money is adequately backed. A bank can lend to a farmer or a gambler, and as long as each of them offers adequate collateral, the money will hold its value.
"The US$ value would indeed be held higher while the trick lasted, but only by spreading the "fiat" part, not by hooking up to any separate backing."
Trick?? Issuing paper bank notes in exchange for adequate assets is a trick? I won't try to interpret what you meant by "spreading the fiat part", but "hooking up to separate backing" is exactly what the bank did when it issued $100B for $100B in British bonds.
"You might just as well argue (as you have) that if a government can prop up a fiat currency's value with taxes, it isn't a fiat currency."
Indeed I have, and there's 2-3 pages explaining 'tax backing' in my paper "There's No Such Thing as Fiat Money", which you can find by clicking on my name above. Briefly, the idea is that a private bank issues dollars against its assets (gold, bonds, etc.), while a government issues dollars against its assets--it's just that the government's assets consist of 'taxes receivable'.
Lance H
"It is sufficiently obvious that money-creation and asset-appreciation will chase each other up a credit bubble. Positive feedback will turn what would have been a short-lived appreciation into a whopping bubble. When the bubble bursts, the debtors declare bankruptcy and the bank is left with worthless collateral."
A rational bank would not lend money against bubbling collateral in the first place.
Lloyd Mints made a more general statement of your argument. He said that as banks lend new money, the price of ALL goods is bid up, allowing borrowers to borrow still more, etc. Mints assumed what he was trying to prove. On real bills principles, the new money is adequately backed, and so will NOT bid prices up. Only on quantity theory principles will the new money bid prices up. Of course, Mints was using this argument to demonstrate the correctness of the QT and the incorrectness of the RBD, so it's no surprise that his assumption that new money bids prices up led him to the conclusion that new money bids prices up. I addressed this in my paper "Three False Critiques of the Real Bills Doctrine", which you can find by clicking my name above.
Published: May 30, 2008 11:57 AM
Mike Sproul:
I agree that Lloyd Mints assumed what he was trying to prove.
But I have not - since I have limited the speculation to a particular sector. If you like, we can assume that prices in all other sectors are slightly depressed as a result.
Your response - that a rational bank would not lend money against bubbling collateral - assumes that the bubble coould be recognized at the time. Alan Greenspan admitted that he could not recognise a bubble until it burst. Until recently banks happily lent into the housing bubble. I think you are counting on a higher standard of rationality than banks have historically had.
My feeling is not that the RBD principles are necessarily incorrect, but that giving banks carte blanche to create money risks speculative mania on a grand scale.
Published: May 30, 2008 5:04 PM
I seem to recall a talk by Peter Bauer on why foreign aid was neither necessary nor sufficient. In fact foreign aid was a direct cause of poverty in the 3rd world. It amounted to "poor people in rich countries given money to rich people in poor countries".
Published: May 30, 2008 6:22 PM
Mike Sproul, you write "Delayed convertibility can work as well as instant converibility, and financial convertibility can work as well as physical convertibility. What really matters is that the issuing bank has sufficient assets to buy back the money it has issued."
That would be 100% correct, if the assets doing the backing were not themselves of a fiat character. For the US$, they are. That leaves it a fiat currency.
Turn it round: by your definitions, there is no such thing as a fiat currency. All you're really doing is trying to capture the meaning of the term and turn it to your own use. Suppose we simply called this type of currency - backed only by government actions, directly or indirectly - "fribble". Then the downside of fribble is just what we've been talking about, and you haven't shown that the US$ escapes the features of fribble and gained the advantages, disadvantages and general character of a bullion backed currency or even a genuine real bills version (that is, one where the bills genuinely are "real").
The Dutch East Indies trick was to make the locals put value into the culture system in exchange for token currency. After that, the currency became backed - but in the process, there was a wealth transfer to the Dutch East Indies Company. During the window while the currency was fiat, the Dutch used the opportunity to get something for nothing. Unlike the usual "printing money", it wasn't spent on something current but on acquiring a lasting revenue stream - so they kept getting something for a past nothing, indefinitely, even after the currency ceased to be fiat.
Published: May 30, 2008 9:32 PM
to mike sproul:
to take on your stock analogy, in the nasdaq mania, most tech takeovers were via scrip. the percentage of cash bids was much smaller. sure, prior to the crash the balance sheets looked great, with their inflated equity holdings. earnings were dismissed as eyeballs became the important metric.
the bubble burst, many companies went bust, and the tech valuations were vastly reduced. this seems to be the same pattern as the rbd.
to anybody:why the insistence on maintaining the valuation of the federal reserve's gold at $42 2/9 oz?
Published: May 31, 2008 5:07 AM
Lance H
"Your response - that a rational bank would not lend money against bubbling collateral - assumes that the bubble coould be recognized at the time."
Banks will be reluctant to lend on collateral with a history of volatile prices, and eager to lend on collateral with a history of stable prices. The market gives banks a natural incentive to balance risk against profit, so a good libertarian should not object to banks issuing money in voluntary transactions.
Also, the RBD says that a bank's money will be stable as long as it only lends against adequate collateral, even if banks only lend against a specific class of assets, Naturally, assets prices can end up higher than expected or lower than expected, and banks will profit or lose as a result, but the RBD gives no reason to think that any prices, even assets prices, would be affected by an increase in the (adequately backed) money supply.
PM Lawrence:
Money can be backed by gold, land, bonds, or 'taxes receivable'. I gather you see some difference between taxes receivable and the other assets. But they are all, in the end, things of value. The RBD says that the value of money is equal to the value of the assets held as backing by the money-issuing institution. So, for example, the fed might issue $100 for $100 of gold, another $200 for $200 worth of government bonds, and another $300 could simply be spent, with the promise that it will someday be collected as taxes and retired. In every case, the fed's assets rise in step with its liabilities, and there is no inflation. Naturally, if the government did not have the ability to collect $300 in taxes, then the last $300 would have been inadequately backed, and there would be inflation
Re: East Indies, define 'culture system'
Newson:
"the bubble burst, many companies went bust, and the tech valuations were vastly reduced. this seems to be the same pattern as the rbd."
That's life. Would you advocate restrictions on stock market investing, the way austrians advocate restrictions on the issue of money?
Lame attempt to explain $42/oz: Way back when the dollar was convertible, and the market price was $42/oz., the fed had no choice but to maintain convertibility at $42/oz. Once convertibility was suspended, it no longer mattered what the official price was, so the Fed's accountants said "When we publish our gold holdings, why go to the trouble of valuing them at current prices? It's easier just to keep calling it $42/oz."
Published: May 31, 2008 7:23 PM
"the bubble burst, many companies went bust, and the tech valuations were vastly reduced. this seems to be the same pattern as the rbd."
mike sproul says:
"That's life. Would you advocate restrictions on stock market investing, the way austrians advocate restrictions on the issue of money?
no, merely pointing out the danger of the rbd boom and bust dynamic. besides, absent the money supply growth, the nasdaq wouldn't have grown in such a manic way.
those who prefer 100% reserve banking don't base their arguments along utilitarian lines (as a way of avoiding inflation/deflation cycle), but rather on the fraud that is perpetrated against current account holders in frb institutions in a free banking environment. that 100% banking regulations would not preclude abuses is no reason not to penalize this fraud, along with all others.
disclaimers, caveat emptor etc. by frb banks are no defense, anymore than any other illecit act can be subject to contract law..
ps: i think your explanation of the $42 2/9 valuation of the fed's gold is very likely, and makes sense. thanks.
Published: May 31, 2008 11:23 PM
Mike Sproul, you write "Money can be backed by gold, land, bonds, or 'taxes receivable'. I gather you see some difference between taxes receivable and the other assets. But they are all, in the end, things of value."
That is not in dispute, apart from your attempt at a bait and switch, trying to slip bonds in with the other comparatively safe stuff; they also form fiat backing, unless behind those in turn there is something more substantial and independent. What is mostly in dispute is that you (a) deny the ordinary usage of "fiat currency" to refer to tax and financial asset backing, and (b) you fail to recognise any difference arising from that sort of backing. I will clarify (b) further down.
"The RBD says that the value of money is equal to the value of the assets held as backing by the money-issuing institution."
No, it does not. You are again trying to capture the meaning of words. The Real Bills Doctrine only accepts backing by a certain sort - Real Bills. I will also clarify this further down.
"So, for example, the fed might issue $100 for $100 of gold, another $200 for $200 worth of government bonds, and another $300 could simply be spent, with the promise that it will someday be collected as taxes and retired. In every case, the fed's assets rise in step with its liabilities, and there is no inflation. Naturally, if the government did not have the ability to collect $300 in taxes, then the last $300 would have been inadequately backed, and there would be inflation"
Here are the clarifications.
If a government was wise and strong enough - that's telegraphing the punch right there - it could operate a fiat currency stably and without inflation indefinitely, and - being wise - would choose to do so. Indeed, it would be able to switch from bullion to fiat and make a gain, exporting inflation by selling off its bullion. However, bullion keeps a government honest. With actual governments using fiat currencies, there is the ever present risk that they will fail in wisdom and/or strength and debauch the currency. And lo! So it has come to pass.
Real Bills Doctrine is less dishonest than a fiat currency, since proponents have the sincere intent that their money is honest rather than a sincere intention that they themselves will never succumb to temptation. They intend that real stuff will turn up in short order to retire any bills that need it if something stops them being rolled over. However, there is the problem of picking winners. The issuers are tempted to overstate the backing assets. Some of the underlying assets don't turn up to retire the bills, and the issuers are tempted to understate the risk and not factor in a risk premium. In a word, their bills leak. (Even bullion can leak, but the risk is orders of magnitude lower.)
"Re: East Indies, define 'culture system'" - no. If you can't be bothered to follow the link I gave when I first mentioned the trick, there is no point.
Published: June 1, 2008 3:41 AM
Mike Sproul will have you guys chasing your tails if you let him frame the argument in terms of the backing for money. Keep in mind that what backs money is not important. What's important is whether what backs money will control the quantity of new money issued. If sea shells could do the job, then they would be as good for backing money as is gold. The issue is quantity, not quality of backing.
Mike drags out his stock market analogy again for the hundredth time. But stocks act just like money with regard to quantity issued. If all companies on a stock exchange increase their issue of stocks by 10%, I can guarantee you that the value of all stocks will decline by close to 10%. For proof, look at the analysts who track the volume of new issues and its effects on prices.
Of course, Mike will come back with his standard reply that is GM issues one or ten shares of stock the value of each will be the same as the old stock because they're backed by assets of the company. But as I have repeatedly written in response, neither will the increase of a dollar or ten dollars in the money supply affect the value of money. Small changes in the volume of anything doesn't affect its value. But a threshhold exists beyond which an increase in volume will affect the value of stocks and money.
Published: June 1, 2008 8:25 AM
Oh, and Mike will respond to the quantity issue by writing that money is a special kind of asset that is exempt from the rules of quantity that governs every other asset or good. Why money is exempt from the laws of economics he doesn't say. But if any of you buy that, I have a bridge I'd like to sell you.
I've been through this debate with Mike many times. I could script it for you if you like.
Published: June 1, 2008 8:34 AM
I continue to see very shallow and superficial analysis on most issues by analists/collaborators of the Mises Institute. The production of ethanol ex-corn (or other cereals) does have an impact on food prices, but why it is being pursued by most governments is the key factor. No way to find the correct answer without entering a discussion on the agenda of the ruling elite. It is just a small part of a much broader topic.
If you can´t stand the heat, get out of the kitchen
Manuel
Published: June 1, 2008 12:52 PM
Newson:
"disclaimers, caveat emptor etc. by frb banks are no defense, anymore than any other illecit act can be subject to contract law.."
If I carry 1 oz of silver in my pocket, there's a 99.7% chance that it will be there tomorrow. If I deposit it in a 100% reserve bank, there's a 99.8% chance it will be there tomorrow. If I deposit it in a fractional reserve bank, there's a 99.9% chance it will be there tomorrow, and the FRB bank pays interest. There is nothing illicit about FRB banking. Quantity theorists object that FRB banking increases the money supply and thereby causes inflation, thereby defrauding dollar holders. But on real bills principles, the FRB bank's assets rise in step with its issue of money, while the central bank's assets and liabilities are unaffected by the private bank's actions. So there is no inflation and no fraud.
PM Lawrence:
"bait and switch, trying to slip bonds in with the other comparatively safe stuff;"
Money can be backed with anything of value, be it land, bonds, or lottery tickets. The physical form of the asset is irrelevant. Value alone matters.
"The Real Bills Doctrine only accepts backing by a certain sort - Real Bills."
Whether a bill is real or not is irrelevant. A carpenter's IOU can back money just as well as a gambler's IOU. The notion that money should be backed only with carpenters' IOU's is a corruption of the doctrine. I can find many critics of the real bills doctrine who held that view. I find hardly any prominent real bills adherents who ever held that view.
" Indeed, it would be able to switch from bullion to fiat and make a gain, exporting inflation by selling off its bullion."
Suppose a government has one asset: 100 oz of silver, and one liability: 100 paper dollars. Its net worth is then zero. If the government sells 100 oz for a building worth 100 oz, then the paper dollars that used to be backed by bullion are now backed by the building, and the dollar holds its value. If that building gives the government the ability to collect taxes, so that $50 of taxes receivable appears on the asset side of the balance sheet, then the government's net worth rises to $50. The government could then print another $50, and spend it digging a hole and filling it in. Now net worth is zero, but the government has a 100 oz building, plus $50 taxes receivable, as backing for $150, so there is still no inflation. Once net worth has been burned up, any additional money spent on holes would now be inflationary.
"Some of the underlying assets don't turn up to retire the bills, and the issuers are tempted to understate the risk and not factor in a risk premium."
That's ordinary market risk, and it no more justifies regulations on banking than stock market risk justifies regulations on the stock market.
Published: June 1, 2008 9:17 PM
Mike Sproul, you cannot argue that something else is "better" than the original as an argument that it is the original. It wouldn't work even if the something else really was better. What real bills are is a matter of definition, and so on. As I said, you are trying to steal the language; it looks like an attempt at a bait and switch.
Published: June 1, 2008 10:16 PM
PM Lawrence:
So change the name of my theory of money from 'real bills doctrine' to 'backing theory'. According to said theory, there is no such thing as fiat money.
Published: June 2, 2008 12:08 AM
mike sproul says:
"If I carry 1 oz of silver in my pocket, there's a 99.7% chance that it will be there tomorrow. If I deposit it in a 100% reserve bank, there's a 99.8% chance it will be there tomorrow. If I deposit it in a fractional reserve bank, there's a 99.9% chance it will be there tomorrow, and the FRB bank pays interest. There is nothing illicit about FRB banking. Quantity theorists object that FRB banking increases the money supply and thereby causes inflation, thereby defrauding dollar holders."
all three scenarios involve theft or fraud. the first two involve abuses of perfectly feasible and legitimate savings methods - holding of specie, and deposits that at all times are covered for potential withdrawal. frb means that inevitably someone will lose money if/when a sufficient number of withdrawals occurs.
Published: June 2, 2008 12:38 AM
mike sproul:
"So change the name of my theory of money from 'real bills doctrine' to 'backing theory'. According to said theory, there is no such thing as fiat money."
like pm lawrence, i believe you are confusing "fiat" with unbacked. if there were no legal tender laws, the usd would cease to be a fiat currency.
Published: June 2, 2008 12:42 AM
Hey, Newson, I am not making that confusion. In fact, I gave a link to the wikipedia article on fiat currency, which describes how a fiat currency is backed. (The key feature is that its backing is dependent on sustained and suitable government action.)
Mike Sproul, I already covered what the difference is when a currency is only backed by government actions. For a wise, strong government, the result is much the same as a bullion currency or similar that forces a weak and/or foolish government to stay on the straight and narrow. The difference only manifests itself in the hands of a weak and/or foolish government that succumbs to temptation and lets the currency degrade. If you think that can never or will never happen, come right out and say so. Don't look now, but there are even some people around who think it has been happening to the US$ all along and has got worse recently.
Published: June 2, 2008 6:20 AM
to pm lawrence:
re-reading my sentence, i see it can be taken in that way. it would have been better thus:
"i, like pm lawrence, believe you are confusing "fiat" with unbacked."
of course you're right, fiat is completely unambiguous in meaning.
Published: June 2, 2008 9:42 AM
Actually, I would not say that the pushers of government intervention in biofuels do not intend to starve countless people. They have killed so many already that they probably would not shrink away from killing more innocents because of their idiocy. We already know how environmentalists feel about human life; take Ted Turner's comments on how he wants to curb the population to 5% of its current status. And, while they receive their jollies through famine, they also get a chance to expand empire by taking advantage of the misery of others by using that as an excuse for interventions in other countries for the benefit of political cronies and more burdens on the domestic population. They would most likely jump at the chance at causing death if it gets them what they want.
Published: June 3, 2008 1:20 AM
Newson:
"you are confusing "fiat" with unbacked. if there were no legal tender laws, the usd would cease to be a fiat currency."
A declaration of legal tender is ineffective without force or other resources to back it up. The US dollar has value because the fed holds bonds and gold as backing for the dollar, and the fed stands ready to use those bonds (and, potentially, the gold) to buy back its dollars. Acceptability for taxes can also give a currency value, but in the case of the dollar that would be a needless duplication of the backing already provided by the fed.
Textbook monetary theory says that the dollar has value not because of backing, not because of legal tender, not because of taxes, but only because the fed limits the supply of money, and people demand that money for liquidity purposes. The RBD is at odds with this theory, and it sounds like your tax acceptability theory is too.
The thing I don't get is: Why don't you and PM Lawrence see the equivalence of backing a currency with gold, bonds, or 'taxes receivable'. In all cases, the money is backed by something of value, and in all cases, the value of the money is equal to the value of its backing, so that if backing rises in step with the money issued, there will be no inflation even though the money supply has increased.
Published: June 3, 2008 12:35 PM
The thing you don't get, Mike Sproul, is what we've spelled out that makes it different. Look at my last two posts, and you will see - or would, if you didn't have a blind spot - that the crucial difference lies in whether the backing is independent of governments doing the right thing. Quite simply, nothing keeps a fiat currency honest because nothing keeps its issuer honest.
You're doing the "beautiful plumage" thing with your own personal dead parrot. You don't see that your construct has nothing holding it together at the "if" in "...if backing rises in step with the money issued, there will be no inflation even though the money supply has increased", and you also don't see that we weren't complaining about inflation as such but about wealth transfers (to the issuers and those close to them - theft, unless they are consented to). Even if backing increased and inflation was held off by it, that would still be a bad thing because that means further taxes are transferred to the government. So, regardless of inflation, when a government issues more fiat currency it gets a wealth transfer; providing more backing to match doesn't change that, it only changes who pays and how.
Published: June 4, 2008 12:28 AM
mike sproul says:
"The thing I don't get is: Why don't you and PM Lawrence see the equivalence of backing a currency with gold, bonds, or 'taxes receivable."
for my part, the important quality about gold is its essentially stable stock. this more or less fixed quantity allows less distortion in comparing different products and services, and also decisions across differing time periods, too.
all other backing can be increased at the stroke of a pen.
Published: June 5, 2008 1:18 AM