Re: Incomes and Exchange rates; part 2

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

Maria Laura Segura wrote:
>
> 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.

Sorry, I didn't mean to imply they have anything to do with economics. I
was only trying to differentiate my use of "mob" from "Mafia."

> 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.

One can hope that revolution occurs without violence. But I would
describe a change from 289% per month inflation to less than 1% per year
as quite a revolution. [I visited the mecon page for that data. I find
such an accomplishment astonishingly good.]

> > > 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.

After a brief look at the mecon web pages, I find it difficult to allow
a label of "high inflation country" to be applied to present day
Argentina, despite its recent past.

I can also understand temporarily using the U.S. currency as a standard
of value, but with the performance you're getting from your new economic
policies, I suspect you will soon realize the undesirability of
accepting the U.S. rate of inflation as part of you standard of value
since it is out of your control. I only wish we could get a monetary
policy similar to this that I copied from mecon Economic Update --

 "In 1992 approval was given to a revised Charter for the
 Central Bank that confirmed its independence from other
 branches of the State. In addition it established that
 the basic mission of the Bank is to preserve the value of
 the currency, eliminating its ability to generate quasi-
 fiscal deficits, severely limiting its ability to grant
 rediscounts to financial entities, preventing it from
 granting short-term facilities and curtailing its
 government security purchasing activities. As a result the
 Government is required to finance its activities by means
 of genuine resources, keeping monetary policy separate
 from fiscal policy."

U.S. monetary policy still dictates the unattainable task of affecting
employment instead of doing only what it can do well. [Maintaining the
value of the currency as your above directive to "preserve the value of
the currency, ..."] so clearly states.

With the success you have been having, why would you want a gold
standard. I can only hope our government adopts such a sensible
approach.

Above you write "we." Out of curiosity, are you speaking we as in
Argentines or we as mecon?

			-- jbod
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