Re: [A-List] The Peso is a "Derivative" of the Dollar

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Mark,

There are fundamental faults with specie money.  To begin with, specie money must
be based on a comoditiy of limited supply. There was a time when new gold was
discovered so abundantly in the New World that gold was the cause of inflation in
Europe.  Thus an effective specie money by nature cannot support optimum economic
growth, because its function is to preserve the value of money.  In a high growth
economy, such as most modern economies aspire to be, the limited supply of gold
cannot meet the necessary monetary expansion, thus gold backed money will be
deflationary and counter growth.  In real terms, if the dollar were to be gold
backed today, it would have to be valued at $35,000 per onze. Two things will
immediately happen: the equity market will fall in price by 100 fold with the DOW
at 80, and Russia and other gold producers will instantly emerged as new
superpowers.

Money is not a storer of value, it does not need to have any intrinsic value at all
to be accepted. Gold coins circulated only in markets beyond the political
influence of the currency issuer. Minsky is correct that money is created whenever
credit is granted.  Thus anyone can create money while legal tender can only be
issued by government. Capitalism is a game for those who has capital.  Under
capitalism, money is a unit of account of capital.  Before capitalism, taxes were
paid with agricultural produce, livestock and textile under feudalism. Under
capitalism, money is not the root of all evil, but the lack of it is.  The
challenge of the capitalist regime is to deliver money to as many of the population
as possible without debasing the value of money or causing inflation.  This logic
was operative under industrial capitalism, because capital then performed a
function of increasing the productivity of labor.  But this function had a limited
lifespan.  Capital formation soon reduced labor's share of the wealth created by
increased productivity to the point of retarding the growth of aggregate demand to
keep abreast of productive capacity.  Marx's insight of surplus value being the
cancer of capitalism is based on this cause-effect.  The purpose of government are
two fold: 1: to prevent revolution (the overthrow of government) and 2: to
institute policies that deliver money to the population through employment in the
non-government sector (not necessarily private).  This is done by granting credit
(a form of money creation) to the economy through government debt which in turn is
serviced by taxes.  When a government runs a budget surplus, it is essentially
draining credit from the economy, thus slowing it down.  When government desires a
growth economy, it has no business running a suplus.  The tax rate is not a
critical as long as tax revenue is not used to reduce the national debt.  A high
tax rate, provided it is not conficatory, will lead to a more dynamic economy
because capital cannot afford to be idle and enjoy gain merely from passive
investment.  A government deficit is a way of correcting market failure, by
government spending on parts of the economy that the market ignores, such as
health, education, infrastructure, pollution control and environmental protection,
security and research with no short term profit.  Any government that incurs
foreign currency sovereign debt should be impeached.  The IMF notion of austerity
conditionality of increasing unemployment to service foreign currency government
debt is self defeatingly irrational.  Full employment with high wages strengthens
sovereign credit rating through high demand in an overproduction economy to
generate needed tax revenue.  There is no positive policy effect  in pursuing
unemployment and tax reduction, the darlings of supplysiders.

The Austrian School formulated their precepts during a very peculier period of
European history, the hyperinflation periods following the two World Wars.  It
preyed on US phobia against revolution by promoting a fear of hyperinflation. The
Austrians propose sound money and free markets as a deterent against revolution,
but they want to achieve it by making money scarce and by shutting off all
unprofitable economic activities.  This creates widespread provety which leads
directly to revolution. Money is more valuable when more people have more of it,
not the other way around.

As for Mark's concern about a properous China consuming energy, I have two
comments.  I have calculated that at the rate of the past two decades, it will take
China two centuries to catch up with the US in per capita consumption. Secondly,
China's romance with market captalism will be very short lived as reality will fail
to deliver the fancy promises of market fundamentalism.  My view is that pretro
energy will be replaced within the next century.  There was a time when it was
thought that if the world kept building fireplaces, there won't be any trees left
to fuel them. Then the world found coal, and oil and gas and nuclear power.   We
have not even began to tap geo-thermal enegery.  The energy problem is a sunk
investment problem, totally solvable but not without some serious Schumpeterean
creative destruction.

Henry C.K. Liu