Thursday, November 11, 2010

The Power Of Pricing Money: By Shady Men or The Invisible Hand


This discussion goes to the heart of the financial problems and the power of bankers and politicians.


Will they let their power go and use a measurement tape, the gold standard?

This, nobody knows. I guess it will depend on the severity of the crisis.




Roubini: Here's Why a Gold Standard Won't Work ... A gold standard would just make business cycles more extreme, according to economist Nouriel Roubini (left). ...What's more, a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment, Roubini said in an interview with NetNet yesterday. "A fixed exchange regime, even if it is not a gold standard... that world just doesn't work. Because in that world, monetary policy by definition instead of being countercyclical becomes procyclical," Roubini told NetNet. Nouriel Roubini "Suppose you have a fixed exchange rate regime... it just exacerbates the business cycle." – NetNet/CNBC.com

The Daily Bell

Dominant Social Theme: Get this idea out of your heads! Gold is finished. It's nonsense. Only more fiat money can save us.

Free-Market Analysis: This is an important article from our standpoint because Nouriel Roubini has always been positioned (or positioned himself) as a practical thinker and "hawk" when it comes to monetary policy. This means that unlike many other economists, Roubini is always criticizing the Federal Reserve for being too soft on inflation. He wants higher interest rates and presumably less money printing in order to retain the value of the dollar. He is in other words a friend to those who are generally critical of the Fed and a protector as well of people's wealth. Or that is what we have been led to think.

But this article seems to reveal that much of Roubini's reputation is based on a kind of posturing. He is happy to pose as a protector of sound money, but as gold rises and the battered fiat dollar continues to unwind, Roubini is willing to come strongly to the defense of the current system. In our view (as we regularly state) central banking is a basic dominant social theme that the Western elite has promoted vigorously as a way to make sure that its efforts to set up world government are well funded. Roubini in this article supports that theme.

The article ends with the words, "Over to you Ron Paul and the Mises Institute!" While this is a surprising conclusion to find within a mainstream article, from our perspective, it is certainly appropriate. The von Mises Institute has in many ways provided us with the initial frame of reference to judge Roubini's statements. What Austrian hard-money economics gives us is a fully formed knowledge-base of how free-market money SHOULD work, and this is precious knowledge indeed, given it almost went extinct in the 20th century.

What Austrian economics shows us is that gold and silver are marketplace money and that only the marketplace itself can determine the volume of money and its value. There are differences, of course, between various hard money schools and the Mises Institute has always made a principled case for full-reserve banking. Here at the Bell we have explored private fractional reserve banking and have presented the Antal Fekete's rediscovery of Real Bills and their role within a private banking system. .

But the important point re-pioneered by the Mises Institute is that the MARKET decides on money; the state cannot. In fact the market might well decide on full-reserve banking. And in a crisis people's real views begin to emerge. This happened during the Bush years in America when the Republican party showed itself not as a Reaganesque-oriented party of the free-market and the entrepreneur but as a big-spending, big-war, big-state adjunct of the Democratic machine it supposedly opposed. Because of the financial crisis we are learning Roubini's real views. Here's a little more about him:

Nouriel Roubini (born 29 March 1959) is an American professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm. After receiving a BA in political economics at Bocconi University, Milan, Italy and a doctorate in international economics at Harvard University, Cambridge, Massachusetts, he began academic research and policy making by teaching at Yale while also spending time at the International Monetary Fund (IMF), the Federal Reserve, World Bank, and Bank of Israel.

Much of his early studies focused on emerging markets. During the administration of President Bill Clinton, he was a senior economist for the Council of Economic Advisers, later moving to the United States Treasury Department as a senior adviser to Timothy Geithner, who is now Treasury Secretary.

Roubini is today a major figure in the U.S. and international debate about the economy, and spends much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Although he is ranked only 410th in terms of lifetime academic citations; he was #4 on Foreign Policy magazine's list of the "top 100 global thinkers." He has appeared before Congress, the Council on Foreign Relations, and the World Economic Forum at Davos.

We can see how smart Roubini is from this Wikipedia bio, but as we pointed out yesterday in our previous article on the gold standard, intelligence does not always equal wisdom. What Roubini is claiming in the article/interview excerpted above is that fixing money to a certain gold ratio does not give central banks enough room to maneuver (ie: print more money). This is a standard central banking argument against a formal "gold standard" as it is often presented.

But in our view, the interviewer at NetNet should have asked Roubini about free-market gold and silver. He could even have asked Roubini if he believed the free-market was capable of regulating money on its own and how central bankers know how much money is enough and how much is too much.

In fact, what is illustrated by Roubini's argument about a "gold standard" is that he conceives of it in statist terms (the state will set the ratio of gold to currency). Apparently, he has never contemplated the idea of a privately run full-reserve gold-and-silver system let alone one that utilizes a variant of free-banking as the United States attempted in pre Civil War days. Here's some more from the article on Roubini and gold:

Roubini seems to think a gold standard is a pretty awful idea. "There are many fundamental problems with any variant of a gold standard," he said. A general summary of Roubini's position on the issue would likely begin by saying that, generally speaking, a fixed exchange rate regime or gold standard limits the flexibility and range of actions that central banks can take to improve a nation's economy in fundamental ways. (For example, in a fixed exchange rate regime, central banks have less ability to maximize employment, stimulate growth and manage price stability.) And, as Roubini specifically pointed out to me, fixed rate regimes inhibit the ability of banks to provide lender of last resort support to an economy when necessary.

The point Roubini is making is simple. He believes that a handful of bankers in a room consulting together can set the price of money more effectively than the invisible Hand. This is a form of price fixing; and we would have liked the interviewer to ask Roubini if price-fixing is effective generally. If Roubini were honest he would answer that price fixing is not effective.

The interviewer could then have asked Roubini what was the dividing line between classical and neo-classical economics. If Roubini was honest, he would have had to answer "marginal utility," which changed the nature of economics forever. Marginal utility explains how the consumption of goods and services becomes less satisfying as they are consumed; in doing so, it emphasizes how only the free-market itself can determine the prices of these units. It is, in a sense, an elaboration of Adam Smith's "Invisible Hand" that regulates the marketplace via competition.

These are powerful concepts and yet the central banking ideology of the 21st still maintains that a few individuals can determine how much money an economy needs. It basically denies 300 years of accumulated economic knowledge.

The cognitive dissonance is startling, as is the realization that Roubini is held in such high esteem and has been named a top 100 global thinker. Roubini is supposed to be a hard-nosed proponent of the free-market, sound money and entrepreneurialism. But he is evidently and obviously a statist, a socialist who believes that groups of powerful people can make up prices for the market and then attempt to enforce them successfully. It would seem to be an economically illiterate position.

Not only that but Roubini does not even seem to understand monetary history generally or he would know that gold and silver have been considered money by cultures around the world for thousands of years. He would know that private market money – gold and silver – with or without free-banking has provided the backbone of many successful economies. He would know that these days gold can be digitalized endlessly and that supply is not even an issue when it comes to using gold to drive a free-market economy these days.

Perhaps we are being too hard on Roubini, and if so we apologize. The interviewer did a good job in many ways and a successful interview involves both parties. Roubini doesn't seem to have offered much that is not standard fare, so we are only reacting to what was said (or reported) in this interview. Roubini may well know all about monetary history (being a top-100 world thinker), but if he does, we wish he would have revealed it. As it is, we are left to wonder if he is avoiding mentioning what he knows, or if he doesn't know it.

As we mentioned above, the interviewer did write the following encouraging words at the end of the article: "Roubini's views challenge the Austrian economists where they live: at the intersection of monetary policy and the business cycle ... We eagerly await the response. Over to you Ron Paul and the Mises Institute!"

Conclusion: It would seem to us that the interviewer is aware that there is an alternative view and is eager to solicit it. It is very possible that it is becoming more fashionable for "mainstream" financial journos to acknowledge Austrian economics as a sign of a certain level of sophistication in their craft. We have noticed this elsewhere, mainly in the friendly reception that hard-money proponent Congressman Ron Paul often receives in mainstream financial interviews. Honest money seems to be coming back into vogue after a 100-year hiatus. We dearly hope this is a developing trend.

No comments:

Post a Comment