Re: Incomes and Exchange rates; part 2

["Maria Laura Segura" <msegur@xxxxxxxx>]

John,


> No. I am speaking only of an angered populace like those who deposed
> Ceaucescu [Sp?] and the marching mothers of Argentina who aroused enough
> sympathy to get action. [They did, didn't they?]

I'd like to tell you a few things about popular movements in my
country (Argentina). The marching mothers of Plaza de Mayo had
nothing to do with the changes in our economy. In fact, no organized
group had to do with it. If things have changed here, it's due to the
hyperinflation. Only after having 289% of inflation in a month, we
realized things had to change. It were the supermarkets ransacking
that showed us we couldn't live with such a high inflation. For the
first time in decades, we changed governments in a legal and
organized way. A democratic president left government 6 months
earlier than expected and another democratically chosen president
came into office. There was no revolution in the streets, the
revolution was in our minds.


>
> > I agree with you that the backing is a virtual insurance, it's
> > just a promise of well behaviour and only if the governments acts
> > correspondence with its promise the mechanism will work. You said
> > that vigilance is necessary and having a fixed exchange rate and
> > a fixed convertion rate makes the vigilance easier.
>
> Yes. My preference for a measure like the CPI as the standard has the
> same "virtuality" as a gold standard, but it has the advantages of:
>
> 1) It consists of enough variety to prevent the government from creating
> an appearance of a stable currency without an actuality of same. With
> gold as the standard a government can set the price high enough to be
> certain that at least some of the supply is surrendered to the
> government to be held in idle storage rather than meeting some other
> demand. Inflation can then rage on until it reaches a point of
> insufficient supply at the "official" price to leave a respectable
> quantity in government vaults. Then the government either devalues the
> currency or [as Nixon did in the U.S.] close the gold window and let the
> currency float.
>
> 2) It most nearly reflects the actual value in use for exchanges.
>
> 3) It is [At least in the U.S.] the measure most used for contract
> adjustments that are of sufficient duration for inflation to be of
> concern.


Using a CPI as standard works well in a low inflation country. But
when you're trying to  keep stable the value of the currency in a
high inflation country or in country with very recent inflationary
memory, it doesn't work at all.  Your third remark helps me to prove
my point, you're thinking on the basis of an economy were inflation
is eventually of concern and you'll eventually adjust contracts. When
there's high inflation eventuality happens everyday.
In your first remark you suggested a goverment devaluation or
changing into a free float  after getting enoug gold in its vaults.
The virtue of the gold standard or any other commodity backing is
that it gives a clear signal to people. If the government devaluates
or changes into a free float it destroys the confidence that might
have generated. The gold standard is a symbol, it represents a
promise given by the government.  It gives people the possibility of
protecting themselves, in case currency loses value, by converting
the currency.


Laura