The General Economics Thread

Build railroads and turn New York city housing into a pure luxury good. New York real estate does not have quite the idiot value that Tokyo does. (Unfortunately, cars have far more idiot value in America than they really deserve, but there's honestly not much that can be feasibly done about that.)

If you can't build a sardine-can arcology in New York (and Americans, for some reason, don't live in coffins quite as comfortably as the Japanese do), then there's a hell of a lot of upstate territory to build bedroom communities in and link 'em by train.

Rent control doesn't work too well. It leads to black-market subletting, people holding onto their little shards of real estate for dear life, and landlords slacking on maintenance because their tenants have no power to complain.

edited 11th Mar '14 5:52:17 PM by Ramidel

I despise hypocrisy, unless of course it is my own.

Well, there's the fact that America has always been a huge country with plenty of room to build out, while Japan is... less so. The Japanese have probably just gotten used to it.

By the way, can you explain what you mean by "idiot value"?

If I had to guess, it's putting a ton of value on something that actually isn't worth it. American would be better off with trains, but so much of us are car obsessed.

That's about it. Cars for teenagers (or less emphatically, cars for single individuals who don't need one for their job), living in New York City when New Jersey would be cheaper even with the commute, and other frivolous and overvalued luxuries.

I despise hypocrisy, unless of course it is my own.

Don't listen to anyone who tells you that we're approaching full employment because of upward wage pressure, so we need to start raising interest rates to ward off inflation.

First, it's just another iteration of the "easy money BAD", "raise interest rates NOW" rhetoric.

Second, it misrepresents the current employment and wage trends. Reduced non-exempt (hourly) work during the winter months causes a statistical blip in wage figures.

Third, we need both wage increases and inflation badly if we're going to escape the zero lower bound, secular stagnation trap.

edited 12th Mar '14 7:42:55 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

There's some pressure on the Bank of England to raise interest rates because the Economy is now accelerating again — they're not planning on doing that any time soon.

Keep Rolling On

England is in the same stagnation trap as the U.S., with very nearly the same cause, and it's at least refreshing to know that the Bank of England isn't caught up in the inflation hysteria. With any luck, the U.S. Federal Reserve will hold out against that pressure as well, especially with Yellen in charge.

That said, all of this is creating an environment where any attempt at real stimulus is politically impossible.

edited 12th Mar '14 9:02:53 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

The Bank of England's rationale for keeping interest rates at 0.5% is not to choke off growth.

However, not all is well at the Bank...

edited 12th Mar '14 9:20:20 AM by Greenmantle

Keep Rolling On

That FOREX thing is dynamite politically, or would be if half the politicians (never mind the general public) had the slightest clue what it is about.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

What makes Yellen different from other Fed chairpeople?

She's had a long professional history at the Federal Reserve, during which she was strongly in favor of keeping interest rates low (post-2008) to foster growth rather than raising them to ward off inflation, among other policy views generally held to be Keynesian in nature.

edited 12th Mar '14 2:29:46 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

@ Fighteer:

Or if they care — there's a lot of Political Apathy around at the moment, a feeling that none of the major parties represent the ordinary person, just the "Political Class". Bankers are often lumped in with that group as well.

Keep Rolling On

That's because they don't, not really.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

...and it's that apathy that UKIP is using to their advantage.

Keep Rolling On

That's always the fun of it. The mainstream parties may be out of touch, but the alternatives are always hijacked by the demagogues (though i may be confusing UKIP and the BNP again. I've heard differing stories about how far away the two actually are from each other, but one of my major secondhand sources on British politics rather fancies UKIP platforms while loathing the BNP).

I had no idea Peter Schiff made so many bad predictions. Holy crap. Why does my brother worship this guy again? Because he was right twice about things that other people predicted, and because my brother agrees with his political views?

I'm not in the mood to argue with him. Let him invest his money however he wants. I'll do my own thing. Let's see who turns out right.

9:12 is when it gets really good.

Is anyone here able to explain to me the concept of "fiat currency"? Specifically, where does a given currency's value come from under this system? I keep hearing "because the people of the country whose government issues said currency believe in it", or "because the government backs it" as explanations, but neither one is a meaningful answer.

Fiat iustitia, et pereat mundus.

They kinda are. I'll try and explain:

Once upon a time, we had commodity money - ie, money that was either backed by commodities (the first paper money) or was a commodity itself (gold coins). Money was accepted because it represented a given value of a commodity, which, for most of the time, was gold under the gold standard. You could, under this system, theoretically go to, say, the Saudi central bank, hand them a riyal, and get a little piece of Saudi gold in exchange. For various reasons, this system fell apart during the 20th century, and the first nation to outright renounce the gold standard was Britain - and thus the half a billion people in her Empire - in 1931.

Now, the money is accepted because the government says it is legal tender and Joe Public and King Market have enough confidence in the stability of the government and the money that it can be used as a store of value. If the public and the government lose confidence in the money supply, it's value will plummet (the Syrian pound, for instance, has collapsed in value since 2011). Basically: your riyals are government issued tokens which you can exchange for goods and services with the Kingdom, or swap with others for their government-issue tokens if you travel abroad. The Saudi government issues bonds, levies taxes, pays debts, lends money, and accepts money for it's oil in riyals, so the markets have confidence in the riyal's value. And unless you are walking around with a purse full of doubloons, gemstones, myrrh, and topazes like it's fucking 1300, you - ie the Saudi public - have enough confidence that the Saudi government will continue to honor it's financial obligations and govern the country, you are still confident enough to accept them as money.

Bluntly: commodity money derives it's value from some commodity like gold or silver. Fiat money derives it's value from law.

edited 13th Mar '14 2:32:25 AM by Achaemenid

Schild und Schwert der Partei

Although not always, as with the case of the Iraqi "Swiss" Dinar: Disowned by the Iraqi Government in 1993, yet still used as currency in the Kurdish Areas of Iraq until after the Invasion^note  There are other examples, for example the Somalian Shilling, but this is the best known case.

Keep Rolling On

More currency stuff.

A fixed currency is backed by the supposed value of some tangible commodity. Gold, silver, wheat, what have you. It's better if the commodity in question has certain properties.

• Fungibility: Any given amount of it is the same as any other given amount. Gold is gold, oil is oil, etc. Diamonds, for example, are a poor currency because it's very hard to make change and it's impossible to make larger ones from smaller ones.
• Permanency: It should be reasonably durable and not consumable. This is why commodities like wheat and oil make poor currencies; the commodity itself is used up, not merely stored.
• Rarity: It should be difficult to acquire more of the currency. This is fairly obvious; if we used leaves for currency, the value would be highly unstable given that anybody could run out and pick more any time they wanted. In a fixed system, adding more currency causes inflation.

Gold and silver have other benefits — they are malleable so it's very easy to form coinage and other things from them. They are shiny, so people like to look at them.

The major problem with fixed currencies is that they create the potential for instability. I've said this before, and will look my earlier post up when I have the chance, but very simply put, if you have less gold than your neighbor, there is no way for you acquire more of it short of digging it up yourself or killing him. A nation that finds itself in a condition of debt or penury is forced to endure enormous suffering in the hopes of slowly rebuilding its fortunes or to give its people swords and guns and march off to die. In short, there is no simple way to redress inequality in a fixed currency system other than war or servitude.

I'll talk more about fiat currencies later, although a lot of what I wanted to say has been covered already. Fiat currencies have the advantage of allowing each sovereign issuer to balance their economy against other currency issuers without subjecting their people to privation. If my dollar is worth a lot more than your dinar, such that my products are too expensive in your country, I can devalue my dollar so that you can buy more of my stuff. Thus, my economy prospers without forcing me to cut my own workers' wages. Fiat currency also allows debt instruments (bonds and such) to act as economic multipliers by increasing demand without being directly inflationary. Fiat currency decouples the internal value of money from the external value of money.

One myth about fixed standards is that they guarantee that the currency has "real" value. This is false. Gold coins have no more inherent value than paper bills; the entirety of their worth is in what someone is willing to trade them for. If they don't think that the shiny pieces of metal will allow them to get something useful, then they won't accept them in payment. All currency systems are based on shared belief. There is nothing magical about fixed vs. fiat in this regard.

edited 13th Mar '14 7:33:43 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

... Well, that sorta answered my question, and yet didn't.

For one, why does Joe Public and King Market's confidence in the government and its money affect the value of the money? It's not like they have an e-voting system where they click "devalue currency" or something.

Also, you say that fiat currency derives its value from law... but then how does that tie into, say, the Euro steadily gaining in value over the years until it technically outstripped the US dollar in exchange rates? I remember hearing that caused a commotion in the US back in the early/mid 2000s, with fears that the Euro will outcompete the US dollar as a world currency.

... I'm sorry, but I don't see how "devaluation" allows you to avoid negatively affecting your workers' financial livelihoods. Doesn't "devaluation" mean reducing the value of the currency with respect to the goods that it's used to buy? As in, you may end having to speed $10 to buy something that you used to pay $5 in the past?

edited 13th Mar '14 9:59:44 AM by MarqFJA

Fiat iustitia, et pereat mundus.

[W]hy does Joe Public and King Market's confidence in the government and its money affect the value of the money?

It has indirect effects. According to the monetarists, a lack of confidence in the dollar ^note I'm using the dollar here as what I'm most familiar with. Insert your own preferred currency here. will lead to two things: a general reduction in spending as people seek to hoard what they have, and increased interest rates on U.S. bonds as people refuse to buy them.

You'd also see a lot of people fleeing to other currencies and/or commodities as they believe them to be a safer store of value. At a certain point, a devaluation panic can become a self-fulfilling crisis as the loss of confidence causes a currency to drop in value, making more people panic, and so forth.

That's the theory, and one much touted via conservative media outlets like Fox News.

In practice, however, "confidence" in a fiat currency has been empirically demonstrated to have no effect on its real value; neither does the ratio of public debt to GDP have any causative effect on interest rates or economic growth. As attractive as that narrative may be, it is false.

The only true examples of hyperinflationary cycles that we have in a fiat currency are when the nation in question:

• Had substantial debts denominated in foreign currencies — like Zimbabwe having a ton of loans in U.S. dollars.
• Had a complete or near-complete failure of their local production economy, such that they weren't making anything anybody wanted.

Since the U.S. has neither of those, we are not vulnerable to a debt panic unless one is deliberately engineered.

I'm not familiar with Saudi Arabia's economy except as much as it depends on oil exports, so I can't speak to the potential for a collapse of its production capacity. I can't imagine that it has a lot of outstanding loans.

---

I don't see how "devaluation" allows you to avoid negatively affecting your workers' financial livelihoods. Doesn't "devaluation" mean reducing the value of the currency with respect to the goods that it's used to buy? As in, you may end having to speed $10 to buy something that you used to pay $5 in the past?

If inflation affects prices and wages at the same time, then there's no change in net purchasing power. If bread costs $1 and I make $1, that's the same as if bread costs $10 and I make $10. Now, inflation does affect the value of hoarded currency, which makes it an encouragement to spend now rather than later.

Exchange rates don't affect the prices of domestic goods at all. How many pounds equals a dollar is irrelevant to me if I buy a loaf of bread that's produced in the United States. It only affects my purchases of foreign goods. If the dollar drops in value, it costs more for me to buy a product made in China or Europe. Correspondingly, though, China and Europe can buy the stuff I make more cheaply. Therefore, currency devaluation encourages the return of industry from other countries to your own country.

edited 13th Mar '14 10:15:01 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Actually "confidence" has a large part in a currency's value, but mostly in terms of exchange rate. It's hard for major confidence fluctuations to push the domestic currency one way or another, unless foreign investors "dump" currency onto the domestic market in such large quantities to prompt inflation (which usually wouldn't be the case since the dumping usually occurs in the financial sector and not in the consumption markets), or the currency becomes such a hot prospect that large amounts of it are "pulled" from circulation causing a deflationary spike as too little money chases the same goods and services. Japan at the height of the recent recession, since until early 2012, the Central Bank had a very conservative outlook. Abenomics really started under Noda, it was just Abe who kicked it into overdrive, happening to coincide with a gradual recovery in other major currencies so that the foreign deflationary pressure on the Yen eased off just as the central bank really started to loosen the strings.

this chart◊ shows the relationship (the top two graphs that mirror each other). Foreign demand, which is basically confidence, moves the entire curve, while the straight line reflects money supply. The intersection on the top is exchange rate.

They "vote with their feet". Let's take an extreme (and very simplified) example: Syria.

It's 2011, and you're a rich man who speculates in Middle Eastern currencies. You see the Youtube videos of Syrian Army IFVs gunning down protestors, and you think "this is all going to kick off, better sell my Syrian £s." As the crisis wears on, everyone puts their Syrian £s up for sale, and so the value collapses because nobody wants to buy. It's simple supply and demand.

Now, let's say you're a baker in Aleppo, and one day a Syrian Army IFV guns down your brother. You can read the writing on the wall, and decide to flee the country. So, you decide to stop accepting Syrian £s and instead take euros or dollars or riyals or whatever, because you reckon the money will soon be worthless. You might also, if you decide to stay, prepare for the coming storm by buying lots of useful stuff. Again, once lots of people come to a similar realization, they stop taking Syrian £s. Nobody wants them...therefore they are not worth very much.

Now, the Syrian £ has not completely collapsed in value, because there are still some investors and enterprises (probably in Iran, China, and Russia, because the West has sanctioned Syria) who will still buy the Syrian £, probably in the hope or expectation that Assad will win the war and the value of the currency will rise again - so they make a profit.

"Derives it's value" was a bad phrase, I should have said "backed by". The Euro, IIRC, was always worth more than the dollar, because the pan-European conversion of existing currencies into Euros converted them at a higher value than the dollar; today $1=0.72 euro. Exchange rates are caused by the mechanism I just described; recent economic events in the Eurozone have caused the value of the euro to drop a bit, but the reason the people of the Eurozone don't say "fuck it, let's use US dollars instead" (like, for example, the Soviet people did and the Russians sometimes still do) is because they still have some confidence that euros will remain the tokens of exchange for the eurozone countries.

edited 13th Mar '14 10:29:30 AM by Achaemenid

Schild und Schwert der Partei

Right, but debt ratios in a sovereign currency issuer have a near-zero effect on confidence, because the exchange markets realize what the prognosticators don't: debt denominated in your own currency has virtually no effect on long-term solvency.

Again, correct. For the dollar to collapse, most people - including within the United States - would have to stop accepting it in trade. For that to occur, there would have to be a replacement already available, or anyone who did it would be cutting their own throats.

edited 13th Mar '14 11:55:26 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"