Gold's Fooled

This is a comment I made at Reddit:

(F)iat money has one unique inherent value: it is far and away the main method of exchanging goods and services.

Switching over the gold, silver or other precious metals that are physically held in vaults while "owners" have currency that is linked to these metals may sound good on paper (no pun intended), but there are problems:

1) Your currency goes up and down in value according to how much gold, silver or whatever is hitting the market. If Russia or China or some other nation suddenly ups production of precious metals, then your currency goes down in value, leading to inflation.

2) Mining companies become the world's central bankers, adjusting inflation according to their production levels but only ever looking after their shareholders.

3) If the economy grows faster than precious metal production, then the result is deflation and increasing levels of precious metal ownership, which would end up becoming a bubble.

4) If the economy grows slower than precious metal production, inflation results.

5) Precious metals are only "precious" because we as humans grant them worth and only do so for reasons of vanity - not because they are inherently useful (the usefulness of gold, silver and other precious metals as an industrial and practical material is minuscule compared to their value as jewelry and such). If we can arbitrarily assign worth to relatively impractical metals such as gold, silver and the like, then we can also arbitrarily assign worth to coins, notes and bank balances.

6) Fiat money is controlled ultimately by a national government (or supranational entity in the case of the Euro) who delegates that authority to a central bank. Commercial banks use fractional lending to create more money by fiat, but their operations can be curbed and influenced by central bank policy (such as raising interest rates, which constrains the money supply and is deflationary, or lowering interest rates, which increases the money supply and is inflationary). So long as price stability is maintained, fiat money has been and will always be more useful than a gold standard (or similar). It is only when central banks give up on price stability that money loses its unique usefulness as a unit of exchange.

($1 Billion will be paid to the first person who interprets the title of this post and the image that goes with it)


Big historical data post on recessionary indicators

(This post will serve as a bit of a link back for future posts)







In defence of the Eurozone and its policies

John Quiggan has written an interesting critique of the Eurozone that is far more objective and detailed than other critiques I have read. Nevertheless I believe it to be wrong.

One of the effects of the "great moderation" was the idea that (preferably independent) central banks should use monetary policy to keep inflation within a certain band. Now that neo-classical economics has been discredited, the time is obviously right for questioning this policy. To my horror, however, the consensus seems to be that the inflation band should be looser and higher - I have argued that it should be tighter and lower, and that absolute price stability be the goal.

The result of this debate is an eventual "Godwinisation" of each other's point of view. The new economic consensus of higher inflation is critiqued by those who yell "hyperinflation" and remind everyone of the 1970s, while the old economic point of view is critiqued by those who yell "deflation" and remind everyone of the 1930s. The result seems to be the assumption that anyone who reminds anyone else of a time period when prices either rose or fell as the basis of their argument automatically loses the argument (see Godwin's Law)

The lessons of the 1930s and the 1970s is very clear - price stability is essential. In the 1930s, deflation in the US hovered around 10%; this was not price stability since prices kept dropping. In the 1970s, inflation in the US hovered around 10%; this was not price stability either since prices kept rising. During the neo-classical revolution of the early 1980s, it was decided that inflation should be handled exclusively by monetary means (increasing or decreasing interest rates) in order to keep inflation within a "band".

Yet the desire for price stability - neither too much inflation nor too much deflation - has its roots more in the Wirtschaftswunder of post war Germany and its policies of Ordoliberalism than in anything post-disco or neo-classical. In fact I would argue precisely that a heavy dose of Ordoliberal policies is exactly what Europe and the US needs.

But then we need to add to this mix the theory of optimum currency areas proposed by Robert Mundell. Quiggan is the first econ-blogger I have seen who has actually mentioned this principle when critiquing the Eurozone. Others, including Krugman, have been railing recently against the existence of the Euro but have failed to even mention Mundell or his theories. Mundell, of course, was instrumental in creating the theory of an optimum currency area and his work eventually led the European Union to introducing a single currency.

But is an optimum currency area a neo-classical idea? That appears to be the assumption amongst critics of the Euro, which means that their dismissal of the Euro as a practicable idea neatly fits into their dismissal of neo-classicalism. Yet there are no neo-classical economists in the English speaking world who supported the Euro's creation back in 1999. We certainly didn't see neo-classical economists arguing for a unified North American Currency shortly after NAFTA. In fact, most neo-classical economists derided the Euro as yet another example of creeping socialism in western Europe, usually while writing words such as "inflexible" and "sclerotic" and "old" and "too generous".

My argument is that neither the Eurozone nor price stability is a result of (now discredited) neo-classical economics. I myself have come to the inevitable conclusion that neo-classicalism has run its course and ideas that "governments can't do anything right; the free market is more efficient; deregulate" are now subject to massive qualifiers (eg taxpayer funded universal health care is more efficient and more effective than a system dominated by the free market, such as in the US). Rather than minimising government influences upon the economy, policy makers must now reconsider re-regulation of certain industries to ensure that the market reaches its potential without causing harm to the society it exists in; to reconsider nationalisation of certain industries where it can be proved that government control is more efficient and serves society better. If that sounds like a good solution to neo-classicalism, you're right: it's Ordoliberalism, and Ordoliberalism applied across a continent of separate countries can achieve far more when prices are stable and when a single currency is used.

For us in the English-speaking west, we are quite ignorant of the hoops that nations have to jump through in order to become members of the European Union and to then, after time, adopt the Euro. A series of measurable outcomes must be met, called the Community Acquis. Many of these outcomes are neo-liberal in tone, such as free trade between member nations, and free movement of capital. Others are almost socialist in tone, including environmental laws, competition policies and employment policies. In short, Acquis is very Ordolibeal in tone, and offers the assurance of a level playing field for a single currency to operate in.

It is my opinion that many in the English speaking west desire the Eurozone to collapse, either to vindicate their positions or as a way to move their focus away from the US and its problems. Europe and the Eurozone certainly have major problems, not the least being the debt crisis that they are in. Yet those who have actually studied debt levels closely (such as myself) have argued that the US is in a worse debt situation than Europe, yet no one speaks about the breakup of the US or the rise of state based currencies - the US is, after all, its own optimum currency area. Since such an outcome is unlikely in the US it should be similarly, if not more, unlikely to happen in the Eurozone.

Europe's debt crisis will wane somewhat as the recovery continues. Germany is already posting strong GDP numbers (which contradicts Quiggan's statement that "in GDP terms, Germany's recovery has not been that strong") and this will help boost the economy of the Eurozone as a whole, including the problem PIIGS.

I'm sorry, but I agree with Eurozone economists on this issue: Price Stability must be maintained no matter what the economic situation, and a single currency will always be better than many.


I concur with Rebecca

Rebecca Wilder at Angry Bear has pointed out that there is a large divergence between unemployment rates in the Eurozone.

Since I am a defender of the Eurozone I leaped at the chance to prove her wrong with data, which did not happen. I'm not going to post huge graphs here but I will post something directly from a spreadsheet.

The point I am always trying to make with Progressive Eurosceptics is that the Eurozone needs to be compared directly to the United States when it comes to comparing data. Just as the United States is a bunch of 50 states, so is the Eurozone a bunch of 17 countries (16 in 2010). Comparisons should therefore be made with US states when applicable.

Anyway, here's what my spreadsheet told me about November 2010 Eurozone unemployment statistics:

And here is a breakdown of the November 2010 unemployment figures for each US state (sorry for small font size):

The standard deviation of the Eurozone, 4.1, is nearly double that of the States of the US, 2.1. That indicates unemployment in the European Union is certainly diverging wildly, as is Rebecca's argument. Interestingly, median unemployment in the Eurozone (7.9%) is lower than the US (8.6%), but such a result needs to take into account equal weighting given to smaller states or nations like Alaska, Wyoming, Malta and Luxembourg.


More on using the Monetary Base as a recessionary indicator

This is pretty much the same sort of thing I pointed out before, except this time I have replaced the NBER defined recessions with a method I think is better - an annual decline in Real GDP per capita. I've also adjusted the graphs so that they are the same length of time and using the same maximums and minimums, as well as adding the historical spread average of 254.44 as a green line.

Annual declines in Real GDP per capita occur at around the same times as NBER defined recessions, though with different start dates and different lengths of decline. One notable exception, which can't be shown on these graphs (due to limits of data) is that a decline occurred in 1956 Q3 but was not defined as a recession by the NBER.


Effects of the Kurnell Desalination Plant

Sydney's Kurnell Desalination Plant began operating during the first week of February 2010. At full capacity it produces some 250 megalitres a day of potable water. As I flew from Sydney to Launceston yesterday, I managed to glimpse it through the window as we flew over Kurnell.

It has not been a great time for proponents of desalination plants, at least in Australia. Popular opposition to the plants focuses upon the greenhouse gases produced by the increased energy needed to operate the plant (a problem offset by the co-construction of a wind farm that produces more kW-h over a 12 month period than is consumed by the desalination plant), the added cost it places upon tap water (which is only a problem when water supplies are not low) and the pollution caused by pumping brine back into the sea (a process which causes increased salinity in the affected area but is also a natural part of the water cycle).

Another problem is that the plant has begun operating during a severe La-Nina event which is known to cause high rainfall levels in Australia. The plant was conceived and built during an El-Nino period when Australia was suffering prolonged drought and low rainfall.

Over the past year I have been collating data from the Sydney Catchment Authority which runs a weekly data series on Sydney water storage and supply - specifically the amount of water gained and pumped by Sydney's network of dams. When compared to the previous six years (2004-2009), 2010 stands out as the year the least amount of water was delivered from dams - a direct result of the increased supply of the Kurnell Desalination Plant.

According to the Data I have collated, the average amount of water delivered from the first week of February to the second last week of December is 466,438.91 megalitres. In 2010, the water delivered in this period was 387,674.83 megalitres, which means that the Desalination plant prevented up to 78,764.08 megalitres from being pumped from Sydney's dams.

At the time that this article was published, Sydney Dam levels have risen to 1,863,500 megalitres, mainly as a result of increased rainfall. This represents 72.2% of capacity, the highest since 2002. If we do the math, we prove that, since 78,764.08 megalitres was saved due to the desalination plant, then we can expect the current dam levels to be 3.1% less than what they currently are - 69.1% - if the desalination plant was not operating.

Moreover, simply by crunching the numbers already shown above, we can see that the desalination plant produces around 17% of Sydney's water - at least if we compare 2010's results with the averages of 2004-2009.

The Kurnell plant was built with the understanding that it would be "mothballed" during periods of high dam capacity. It was also decided that the plant would run continuously for two years to iron out any problems before any "mothballing" would occur, so the chances are that the plant will continue to operate throughout 2011 no matter how full the dams get.

The Kurnell plant has been designed to allow for a doubling of capacity if needed - land has been set aside at the site for more buildings and the piping to and from the plant has been designed to allow for a doubling of capacity. If rainfall levels in Australia and Sydney continue to decline (despite the recent wet weather) then increasing the capacity of the plant will be a cost effective solution to any declining dam levels.

Since it would be more efficient to operate the plant for long periods and mothball it for long periods (as opposed to short periods for both), I would suggest some sort of "trigger" mechanism to be put into place:

* 75% Capacity: The plant will be shut down and mothballed once stored water supplies reach 75% capacity.
* 50% Capacity: The plant will begin operating once stored water supplies dip below 50% capacity.
* 25% Capacity: The plant will be doubled in size once stored water supplies dip below 25% capacity, or else another desalination plant built if this has already happened. (This assumes that the plant has been operating continuously since supplies dropped below 50%)