Zimbabwe: When Even the Central Bank Can't Keep Up 30 comments
December 02, 2008
an article to
-
Font Size:
-
Print
- TweetThis
The Reserve Bank of Zimbabwe reports:
Between the 10th and the 20th of November, 2008, total fraudulent cheques we intercepted in the clearing system had risen to $60 hexillion ($60,000,000,000,000,000,000,000).
Someone really ought to tell Zimbabwe's central bankers that there's no such thing as a hexillion. They might as well say that they've intercepted sixty gajillion dollars' worth of checks.
The word they're looking for is sextillion, as they'd know if they only read this blog. On the other hand, the number of times that someone has helpfully written out a number first in words and then in bracketed numerals has now increased to one (1) from the prior zero (0).
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Our plans are complimentary. You reject the current money model while I attempt to make it work. Yours is fully consistent as I would expect from you. I would love to prove that a rapidly growing and stable economy is neither dependent on fraud (FRB) or the availability of a particular commodity. How could such a wonderful thing as money have dishonest roots or arbitrary requirements?
And only 8 'rules' to boot, two of which are definitions.
K.I.S.S.
The more complex rules would include provisions for the Smarty_Pants everlasting bond issuance as well.
At best, central bankers are barbarians; at worst they are thieves via FRB. Is this not an investment opportunity?
The main reason he called it that was that the use of a fixed gold standard restrained governments from massive creation of money in order to 'fix' society's ills. You couldn't apply the 'enlightened' knowledge of monetary policy if you first had to tax the money away from the serfs. They got a bit grouchy when the taxes got too high.
So, gold was 'barbarous'. It limited your flexibility to apply ideas which were 'obviously' a better way to run things, in his view.
And as a result, you can see just how much better off we are today. JMK's 'enlightened' ideas have turned the world's largest creditor into the world's largest debtor in less than 30 years.
Yay! (NOT)
Assume the fractional reserve banking system does not create enough new loans to balance repayment of old ones. The money supply (M) will then drop. According to MV = PY, assuming unchanged V, then PY must drop one to one. Y, aggregate output, is unlikely to change immediately so then P, the price level, must drop one to one also. Normally, P drops due to increases in Y resulting from productivity gains which is a blessing. But now in a reversal, the drop in P causes a drop in Y (lower demand for output). So now, both P and Y have dropped. Thus according to MV = PY, V the velocity of money must also drop. So, a simple reduction in new loans has increased prices, decreased output, and lowered the velocity of money. Thus, just to avoid recessions, fractional reserve banking requires ever increasing credit expansion.
<i>mv = py
If you want to know
it will tell you why.</i>
CORRECTION!! Make that lowered prices!!! Inflation on the brain, you dumb moonbat.
1. Incorporate and sell common stock to bank members, retain 51% (so the evil banking cartel can't take control). This proceeds are your bank capital. Use to set up office, hire Smarty, etc.
2. Sell as much preferred stock as possible but not to exceed bank capital? This is your initial money issue. Explain to buyers that they may deposit these shares to be loaned out for interest both for the bank and themselves. Explain how their preferred stocking holdings shall be protected from dilution when new preferred shares are sold and thus the value of their holdings should permanently increase but only while there shares are on account. Also explain how the backing by commodity futures should grow over time. Explain to common stock holders that they should own preferred stock too since this should appreciate the most rapidly.
3. Start buying and selling commodity futures seeking appreciation in value or minimum depreciation in value with proceeds from preferred stock sale. Use relatively safe strategies Avoid reportable capital gains if possible and legal. This is the backing of your money.
4. Start lending out preferred shares at competitive interest rates with acceptable collateral according to "A proposal for an optimal money and banking system".
5. New money creation must be handled in an ethical manner. The buyer shall buy a futures contract in the same commodity as the existing backing and with the same expiration date and make a short term non-interest loan of it to the bank. The bank shall issue new money (preferred shares) in accord with the amount of the futures contract and current backing levels. The bank shall then determine how much money of the new money will be used to buy the futures contract so as to allow a pro rata distribution of the remaining new money so as to prevent dilution among existing money (preferred stock) holders. Those amounts will then be given to the new money purchaser in exchange for the futures contract and distributed to the existing money holder accounts respectively.
6. Redemption of money shall occur by selling an existing futures contract for US dollars and paying out the appropriate amount based on number of shares redeemed and current per share backing level in US dollars as determined by the amount received from sale of the futures contract. The remainder shall be used to purchase another contract with the same delivery date. The shares shall be destroyed and existing money holders informed of the expected drop in the price level in this money.
7. Refer to "A proposal for an optimal money and banking system" for more info.
8. It occurs to me that a single asset might be used to back the money. However, redemption of money would require sale of that asset for US dollars and repurchase of another asset. A solution would be loans from bank capital between asset sales.
10. Moonbat's understanding of the stock market and futures market is limited and what he has said above is likely to have flaws. Corrections and suggestions are therefore welcome.
?
1) M drops,
2) less M implies each M-let has more value and will buy more Y-lets
3) Y being unchanged (due to inertia) with less M yields lower P
4) Lower P-lets means people will buy more Y-lets, hence increased demand and increased Y-let production
In the end the changes in P (down) and Y (up and ) will balance out the change in M (with perhaps a slight change in V).
The assumption is that Y and V are difficult to change quickly for small changes in M. The bulk of the 'correction' will be in P.
P can change in very short order.
Y, obviously, takes longer to change due to production issues.
V changes are more of a social inertia issue and will only change drastically for a severe economic dislocation. Your spending habits don't change much if you hear that the money supply changed by 0.5%, but they might change a lot more if you heard the money supply had tripled.
M - dollars
V - transactions/year
P - dollars/unit
Y - unit-transactions/year
So, dollar-transactions/ye... = dollars/unit * unit-transactions/year...
My understanding was nearly correct except for the "per year" aspect. Moving on ...
"4) Lower P-lets means people will buy more Y-lets, hence increased demand and increased Y-let production " Smarty
I agree that people would wish to buy more Y-lets because of the price drops but where will the money come from since we both agree that it was a drop in M that caused the price drops? So then, according to MV = PY, either Y or V must drop, followed by the other till equilibrium at lower values of total output,price level, and transactions per year. Rothbard says that the economy will adjust to a drop in the money supply but apparently at a lower output level.
In theory, any amount of money in an economy is adequate but changes in it can be a killer, it seems. Price deflation caused by increased output because of productivity increases is all to the good. But price deflation caused by decreases in the money supply is a mockery since people can't take advantage of them.
FRB truly does seem to require endless credit expansion to prevent actual output reduction.
But yea, I assumed Y would drop followed by V but it doesn't matter since they must both decline if the equation is to end up balanced.
Iron sharpens iron. But it also sharpens moonbats, I hope. Thanks for the feedback.
Not entirely true. If you are earning a stable wage and prices fall because of a lowering of M, your salary won't decrease (hopefully), but you will be able to buy more Y with it, or save more.
The trouble with less M is that some borrowers won't be able to pay off their debt and go under, especially if it's a business and worker-bees wind up without a job as the economy adjusts to new money levels.
The 'bad' aspect of lowering M is repaying debt. Each M-let is worth more so the true 'cost' of servicing your debt increases.
If you can keep your job at the same pay and aren't over your head in debt then you will be better off as your income and savings are gaining in purchasing power when M decreases.
Your general statement regarding lower prices via increased productivity is correct however. That's the preferred path for falling prices. The 'best' arrangement is a stable money supply with increasing productivity. Savings will go where demand is highest and standards of living will increase over time.
That's my take on it, though I've been wrong about things a time or two in the past.
I can see why you would pick a fixed money supply because even increases in precious metal supplies when bought with new money could potentially be enough to cause price inflation. But what could back a money that can't be discovered in a huge new PM mine or be the result of a spectacular growing season or be subject to oil fields being blown up? What is it that in a stable 100% reserve economy would grow steadily based on sound loans? Two things at least, business equity and business real estate. With a sound 100% reserve banking system both should grow steadily without a boom/bust cycle to worry about. And this is truly beautiful or I miss my guess. The asset backing will appreciate in value from investments made with real savings based on saver time preference. This in turn will allow the issue of new money to keep pace. Sounds like a potentially runaway loop, doesn't it? But it isn't I bet because of the need for real savings. Why issue new money? Because without it the money will appreciate to the point where new entrants are denied. Smarty, I think this could cream the FRB system or I have never been an engineer.
Think of gold as only another good or product, then it has an inherent 'price' in every other good for every person based on their relative valuation of the other good. 1 oz of gold might be worth 1 hour of lawyer A's time or 20 chickens or 100 eggs.
There isn't even a 'fixed' value to gold. Everything is relative to each actor's preferences and values. If you have thousands of ounces you might be more willing to pay an extra ounce for something than you would if you only had 10 ounces to start.
The fact that there is still gold to be mined means that there will be a natural tendency for the stock of gold to increase as its value increases.
As productivity and effeciency increase, the prices of 'stuff' will decline in terms of gold (or, the value of gold in 'stuff' will rise). At some point, the value of gold will be high enough that someone will go to the effort and expense of mining more gold because the value received for it in 'stuff' will outweigh the expenses of mining it. The miner will profit for having increased the money supply and in the effort reigning in the value of money.
The profit driven mining operation will help to moderate the increase in the value of gold by increasing its supply in response to its increasing value. When the price of gold falls far enough from increased mining output, mining will slow or stop in response because it will cost to much relative to what the gold will buy.
As long as there is more gold in the ground, there will be limits to the amount gold's value can increase from productivity improvements because someone will realize that he can profit by digging up more gold.
I think that sort of addresses your concerns about money being 'too expensive'. Unless and until there is no more gold to dig up then the market will help moderate its value. Even after that point, a substitute money might emerge to supplement gold as money. Maybe platinum, palladium, silver, or rhodium. They are all rare and could be used as an extension to the money supply.
Personally I don't think money can ever become "too valuable". I'm not sure what you mean by 'new entrants are denied', but anyone can earn money by laboring. We all start that way. After that point you just have to live within your means and save until you can afford to compete with the heavyweights.
The only issue I can think of is trying to provide smaller and smaller units of account as the value of money increases. Gold can easily be split into very small sizes and so this wouldn't be a big problem for quite some time. Currently gold is measured in pennyweights (1/20 oz) and grams (~1/31 oz). These are worth between $20 and $35 at current gold prices. They could be further subdivided, or as in the past, silver can be used for smaller increments.
I apologize for not providing this flow diagram:
true savings + time preference -> business loan -> increased productivity -> increased output -> lower price -> additional true savings.
So, business productivity, verified by additional savings, has occurred. So the stock price should rise. At that point, the asset base of the money has risen; the same amount of money is backed by a more valuable asset base. Eventually, it would be a Berkshire Hathaway of moneys. Notice that the FRB banks back their FR loans with IOU's since they create money in anticipation of economic growth. The money itself is fiat. But with this system the money itself is backed with real equity built with real savings in a glorious and stable feedback loop of prosperity.
These are hard times and the banking system caused them. A solution will be found I'm sure, if this ain't it.
Don't mean to rain on your parade, but these are the scariest words you have written on the topic to date. :-)
I have learned to be skeptical of any plan which makes claims using words like 'glorious'. At best a system should be robust enough to survive the eventual stupidity of the participants while providing no means for individual actors to rig the game in their favor short of providing superior products and services.
I am not sure any system creating money via any means other than selfish profit would be sufficiently robust. Somebody would figure out how to tinker with numbers for their own benefit.
At least the gold backed system requires someone to spend their own resources and dig in the dirt before they get paid.
Well, the bank and savers make money off interest on real savings produced by real productivity gains. Yea, the crooks will find a way somewhere. But now honest folk may not have to be yoked to a crooked system everywhere. Imagine if your best friend was married to someone who made their life miserable. That's how I feel about the free market and FRB.
If nothing else, cheaters will eventually burn enough bridges that it will become common knowledge that they tend to cheat and others will either be much more careful or choose not to deal with them at all.
Economic isolation is a very harsh punishment in a division of labor economy, so the cheating usually doesn't get out of hand unless the gub'mint forces it on people (as with FRB).
There aren't many successful arguments to be used on someone who is poking a gub'mint gun in your belly.
I am encouraged that a central government was Israel's desire not God's when He said they rejected Him in desiring a king.
Your instincts were correct, Smarty. That has been fixed. I'll post the finished system whenever I won't seem too far off topic. I'm pretty sure God is tired of FRB because this system will beat the pants off it in every thing except the short run. It's taken a while to get here, though. Thanks for taking the time to critique my thoughts.