Tuesday, January 29, 2008

How to Resist the Temptation to Scapegoat

It's always tempting to scapegoat some player in a game that is not going the way you want it to, even when the problem lies not with the players but with the game itself.

I am having a friendly debate with a very good friend, an economics and law professor, who insists that we need more regulation, that the government hasn't done enough to prevent those evil bankers and brokers from getting rich off the backs of the poor innocents of middle America.

I argue that, although it may be true that some bankers are rotten and regulators have been sleeping at the wheel, this will always be the case under macroeconomic and regulatory conditions such as we have in the US today.

I maintain that the underlying fault lies not with an individual player's greed or incompetence, although this does play a role; it lies rather with the foolish adaptation of bad rules of the game, rules that are based on the fallacious notions that government can manage a macroeconomy and that monopoly-encouraging intrusions by regulators into the banking industry, among others, are helpful.

While perusing today's Wall Street Journal, I received some help for my side from their daily human-interest column about a Venezuelan banker named Victor Vargas.

Victor Vargas
[Thanks to polobarn.com for the photo.]

If anyone walks and talks like a greedy banker, Vargas is it. This is the kind of fellow my friend loves to hate. Read what Vargas says:

"People write stories about me saying I have a Ferrari, a plane, a yacht. But it's not true. I've got three planes, two yachts, six houses."

Can you imagine Mozilo saying something like this? Vargas is just the kind of man who would get lynched here in the US for saying something like that in times like these.

But several other sentences leapt off the page at me:

"Venezuelan elites have learned to profit amid repeated volatility."

Exactly. People adapt in difficult times.

Some argue that these are the most stable times we have ever lived in. Some believe, as Milton Friedman and I do, that things could be much more stable if government and their appointed economists would get out of the money management business.

The 1970-80s inflationary-stagflationary episode incurred unprecedented capital losses. The extent of the financial market instability of those years has been compared to the Great Depression.

The 1980s and 90s brought us Latin American bank bail-outs, US savings bank failures, and a hedge fund panic. 2000 gave us the Dot.com crash. Today we have the housing bust and the credit crisis, an interrelated double-whammy.

Each time, macroeconomic policy has accommodated us back into the same expansionary credit parameters that brought us all of these episodes in the first place. And today, once again, we're issuing more credit to bail ourselves out of the 2007 housing and market crises--actions that will only serve to create our next bubble, unless the world has finally lost faith in our money managers' capacity to steer the ship.

Just look at the damage to the dollar. According to the AIER, you need $20.78 today to buy one 1913 dollar's worth of goods.

Markets have simply adapted to the fluctuations, and market players have learned to live with the new rules. Volatility has become the norm, in the US as in every country around the world. Look to the most flagrant examples (like Venezuela) to study the underlying phenomenon at work.

More quotes:

" 'Venezuela has developed a special business culture, where the game is played amid high inflation and other distortions,' says Venezuela-born Latin America specialist Gilbert W. Merkx, who directs the Duke University Center for International Studies. 'You can either get very rich or lose a lot of money playing the game, and it always gets more complicated as the distortions get worse.'"

Exactly. People adapt. Just because US inflation is at only 4 percent while Venezuela is at 22, doesn't mean that the players don't adapt, that "a special business culture" doesn't develop. It does.

"Mr. Vargas says his survival strategy is remaining agnostic about politics."

Exactly. Play the field. Don't play politics. Where have we seen that before? How many US companies wait to see which way the political wind is blowing before writing their campaign finance checks?

"In 2002, [Vargas] helped convince other bankers not to join strikes led by businesses that were aimed at ousting Mr. Chavez. As president of the banks' industry association, he helps negotiate banking regulations."

Exactly. Where have we seen that before? How many US banking regulations are put in place through consultation with industry big-wigs? Why fight city hall when you can feather your nest and get so big the government has to bail you out if you bet incorrectly?

" 'A businessman has to deal with his government, no matter how far to the right or left it is,' he says."

Exactly. A businessman is a businessman. He is not an idealogue, or even an idealist, except in his more private moments. A businessman enjoys the challenge. He plays by the rules, no matter what they are. And if the game is rigged, the tough competition will attract some rough characters who don't mind playing by rigged rules because they have a knack for manipulating people and rules to their advantage. At some point the less ferocious will throw down their cards and leave the table, leaving only the hard core participants. "I'm an intuitive guy," says Mr. Vargas.

"Mr. Vargas's high-level government contacts have attracted critics who say he's suddenly become rich as 'Mr. Chavez's banker,'" which he doesn't deny directly, side-stepping the accusation with statements like, "I've been rich all my life!" and that he's only met Chavez twice.

In sum, for the winning players in a rigged game, the motto is "Why beat 'em when you can join 'em, play unfair, and make it really big." That's the strategy that works today, in Venezuela or in the US.

Who is our US Treasury Secretary? Henry Paulson, former CEO of Goldman, Sachs. No personal attacks from me, of course, rather just an observation of the tight relationship between government and big business, even in this "capitalist" country (see links below).

Who is recommending that the Fed go ahead and issue credit galore to save Wall Street, even if it means tanking the dollar--indeed who has rationalized dollar devaluation, through a "non-partisan think-tank," "scientific," "economic" evaluation, into a way to solve our problems? The Peterson Institute, whose chairman is a founding partner in one of the largest hedge funds in the world, Blackstone Group, and who was once a Secretary of Commerce and an Assistant to the President for International Economic Policy. (His partner at Blackstone is a former Yale colleague of George W. Bush. Small world, isn't it.)

Want to influence government policy? Create a think-tank.

What do you say to this, dear Professor?

See this post for the development of my argument that government incapacity to manage the macroeconomy and over-regulation are the causes of our problems. I also describe how this country is a mixed economy, not a purely capitalist one, which may just be affording us not the best of both worlds, but the worst.

Labels: , , , ,

Sunday, January 27, 2008

A Bit of Humor about the Stimulus Package

Sometimes I manage to laugh at government's attempts to be useful. Here's my latest cartoon. (Click on the image for a larger version.)

Labels: , , ,

Friday, January 18, 2008

"Keynesian Kool-Aid" -- Catchy Phrase for the Stimulus Package

Listen to this Cato podcast featuring Chris Edwards to get the proper perspective on the forthcoming "Stimulus Package" that President Bush, Treasury Secretary Paulson, Fed Chairman Bernanke, and Congress all seem in a hurry to put in place. It's a race to see who will get the Most Caring Politician prize.

[Thanks to Kraftfoods.com for the image.]

Edwards says this about government stimulus to the economy:

"I think that Mr. Bernanke has been drinking the same sort of Keynesian Kool-Aid that other prominent economists like Larry Summers have been drinking. I don't believe it works. I think it simply pushes debt onto future generations of Americans, so I actually think there is a moral question here. A stimulus package simply is the federal government borrowing more money, giving it to people now, just sort of randomly and then putting the tab on taxpayers and our children in the future. It seems to be very immoral for the federal government to go ahead and do this when frankly they have no idea what they are doing with the economy.

"Economists have a horrible track record on forecasting what the economy is going to do, even a few months ahead of time. This sort of stimulus package is just a shot in the dark, it's a big waste of money and it just increases the nation's debt."

Daniel Mitchell of Cato concurs, saying:

"Rebates are particularly disappointing because they resuscitate the discredited Keynesian notion that an economy benefits when the government borrows money from people in one sector of the economy and distributes it to people in another sector of the economy. Economic growth occurs when there is an increase in national income, not a redistribution of national income."

Finally, a little common sense. But that never stopped a politician, nor for that matter a Federal Reserve Board.

The same comments above could be applied to the Fed technique of issuing credit to the monetary system. It's really just robbing Future Peter to pay Present Paul. At some point, the credit tab must be paid.

Labels: , ,

Capitalism's Scourge

Reading the Wall Street Journal's lead story today, I can't help but think back and wonder just how this mess could happen in a world that has supposedly "seen the light" about free markets and capitalism since the 1980s.

The article describes the difficulties soon to be revealed by some very large insurance companies, who are required by their contracts to pay up during this financial turmoil but who are unable to come up with the cash as promised. The potential amounts involved are so large as to cause tremors of fear to ripple throughout the stock markets of the world. This is only the latest of many death knolls for the recent booms in our boom/bust/stagflation economy.

[Thanks to news.bbc.co.uk for this picture]

Many people, from wise old economic owls and international financial geniuses, to permabears and silly gadflies like me, saw these events coming. (See this post for links to past warnings from all sectors.) I as a staunch capitalist can't help but ponder, how is it that brilliant corporate minds could allow their companies to get us into this? It's really mind boggling.

My easy answer is twofold (admittedly not scientific).

The Mixed Economy

Surprise, surprise, the US does not have a capitalist economy. Over the last couple of centuries, companies have realized that the best way to survive next to a growing public sector is to work hand in hand with city hall rather than trying to fight it, because of the mutual short-term privileges this affords both parties. You rub my back, I'll rub yours.

The naive believe that large corporations prefer free markets, but this is not always true. Some--and some of the most successful--have found it is much easier to achieve their goal of monetary success (profit is not an improper goal) by using all the tools at their disposal including the politicians, rather than "wasting their time" manifesting on behalf of a political ideal such as a more pure capitalism, especially when that ideal is rejected by a majority of voters.

It's the old "if you can't beat 'em join 'em" syndrome.

Example: In order to stem bank failures experienced during the 1800s, and to give themselves the allure of protectors of the poor, the US state and federal government politicians began toying with the idea of requiring banks to obtain special charters in order to deal in certain transactions. The banks resisted at first, but quickly understood that by acquiescing to this requirement they would be able to limit the playing field around them.

The new requirements would throw rocks and hurdles at the big banks' competitors, thereby obtaining for the larger, more robust survivors special status and monopoly-like privilege with protection from the state. (This is not always the panacea it appears, to wit some of the railroad "robber" barons of a hundred years ago who disappeared just as quickly as they appeared.)

This phenomenon of mutual vice has taken hold over the years behind the public's back and in the name of "public welfare," and today our biggest financial houses have become so intertwined with government, so huge, that they are now what economists refer to as "too big to fail." In other words, any threat to their collective survival means instability for the whole economy, if not even for the entire world.

I continue my conjecture by stating that such power, influence and monetary gain (you've heard about the salaries of the big CEOs, including their bonuses, stock options and severance packages) attract not only very able people, but also a few less than honorable people who don't mind compromising their capitalist ideals, and/or some with limited longer-term foresight who--to give them the benefit of the doubt--have not been excessively thorough in their analysis of the risks they are asking the nation to incur and insure through too-big-too-fail government bail-outs and FDIC and other compensation.

Fiat Money

The second part of my answer deals with the "fiat" (unstandardized) nature of money in today's world economies. See this post and others for an explanation. In sum, the wave of excess credit issued by the central banks of the world caused much mischief in financial markets and is a major factor in our mess.

Both of these elements come from the public's irrational behavior--or let's call it emotional behavior, so as to avoid a t'is-t'aint-style academic economic debate. We approve of capitalism, but we also approve and vote for quick fixes for "me." Does it feel good to have the government act as protective daddy and approve of banks through charters, even if it is counterproductive? Most will answer yes. The counter-productivity doesn't show itself until too late, and in obscure, misleading ways.

Does it feel good to have insurance on our CDs and checking accounts through the (insufficiently funded) government FDIC program? Of course. Do we want to punish the big finance houses even if it means we ourselves might suffer? That would be masochistic.

Walking the straight and narrow is difficult for all parties to the capitalist game, and the result is a mixed economy that causes more trouble than it cures.

Labels: , , , , ,

Thursday, January 17, 2008

Comic Relief: When Tears Won't Come, Try Laughing

This idea from my friend Charlie, about the government's efforts to cure our banking problems, gives me a chance to practice my cartooning skills once again. (Click on the image for a larger version.)


I guess the government and Fed just don't get it, i.e. that the origin of this mess is the very tool they're using to cure it.

In my previous two posts you'll see that I'm not alone in this opinion.

Labels: , , , ,

Wednesday, January 16, 2008

Anna Schwartz Joins the Fed Bashers

No sooner had I pushed the "publish" button on my previous post, that the illustrious Anna Schwartz joins the Fed-bashing fray, according to this article at the London Telegraph, quoted by Ambrose Evans-Pritchard.

[Thanks to nber.org for the photo.]

Anna Schwartz, still fully active and coherent at 92, is one of my favorite economists and a co-author with Milton Friedman of a classic text called "A Monetary History of the United States." She issues what EP calls a "scathing indictment," of Fed policy under Greenspan. She says:

"They [the Fed governors] need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence.... There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.... It is clear that monetary policy was too accommodative [in 2003 and 2004]. Rates of 1 per cent were bound to encourage all kinds of risky behaviour.... This attempt [by Greenspan] to exculpate himself [by blaming an Asian savings glut] is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events.... Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt...."

Goldman Sachs wants the Fed to loosen rates to combat the problem, but as one of the commentators after the article notes: "[Goldman Sachs economist Jan Hatzius] is proposing reducing interest rates further? What about inflation? It is getting scary when oil hits $100 a barrel and we are lowering interest rates. I want to be paid in gold next year!" (Posted by James)

Note that Anna Schwartz is not credited with having recommended Fed loosening, but rather with stating that "liquidity doesn't do anything in this situation." She also states that our present quandary is nothing like 1929. "This is nothing like the Depression. I don't really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far." (Well, she doesn't mention the big Wall Street firms' poor balance sheets; mortgage company bankruptcies; German, French and Spanish banks' troubles; Countrywide's near-miss; WaMu's coming buy-out; and NetBank's demise, this last probably only a coincidental incident.)

We are in a very sticky situation. It is true that stifling credit right at this moment would be devastating, but I would agree with Professor Schwartz that gobs of credit will not necessarily cure the disease. We may just have to plug through this.

The Fed is experimenting with ways to handle the blips as they occur. They will certainly lower rates on or before January 30. Meantime, they are lending billions of credit through another "banking" window, purportedly on a temporary basis, to sidestep inter-bank stoppages that risk throwing the economy into unnecessary turmoil.

Foreign money is also cooperating, furnishing needed capital to shore up our big Wall Street firms. I much prefer that to seeing them declare bankruptcy and using up the little FDIC cash we have on hand. As I said earlier, this foreign investment is the ignominious savings glut the Fed was trying to implicate in our previous credit problems. It will surely come in handy now, won't it?

Labels: , , ,

Tuesday, January 15, 2008

Gold's Come-Back as a Monetary Metal

So, even the editors of the prestigious Financial Times are beginning to talk about gold's staying power. In an editorial from January 7 entitled "Gold is the new global currency", we can decipher (between the lines) my oft-repeated mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

Here's what they actually say:

"Part of gold’s allure is its traditional status as a safe haven. It is seen as a store of value when everything else seems risky. But the bigger drivers behind the rising spot price are a depreciating dollar and the prospect of negative US real interest rates."

Right on. Some people are no fools, in spite of what the central bankers may believe. Wiser members of the public, including some large investors, believe:

(1) That excess money creation through credit pushing by the Federal Reserve and other central banks around the world has created bubbles in the economy;

(2) That those bubbles now so evident in the US, i.e. in real estate, mortgage lending, and "Wall Street" speculation, are no exceptions and are signals of particularly pushy recent credit maneuvers by the US central bank; and

(3) That the academics can throw around phrases like "global savings glut" and "increased emerging-economy demand" until the proverbial bovines return to the barn, yet gold will always be the ultimate store of value in times of monetary excess, which we believe is now for the fourth time in US central bank history: Leading up to crises in 1929, the 1980s, 2001, and today. (Note how the market is taking less and less time to wise up each time.)

Yes, saving is a popular pastime in Asia, and yes demand for oil, etc. from those countries is increasing; but why are these savings and that demand only appearing after 2001? And how did those enormous state funds get so big, holding onto all that wealth, if the savings were already invested in the US? If you think the savings glut is the cause of our bubbles, just you wait until they really start investing the rest of their savings here as our asset prices bottom out. The rush has just begun.

And yes it's true, gold's value fluctuates wildly; but this wouldn't happen if governments didn't play with the monetary unit. When governments do, you can bet they will screw things up and that gold will, as usual, be the ultimate bubble, whether it's now or within the next decade or so.

In fact, gold's instability is a kind of thermostat, telling us how good our central bankers are doing. This is its new-found role in our global monetary system: Central Bank Watchdog. It's the opposite of the canary in the mine shaft: Gold thrives when the fragility of our monetary system reveals itself and grim reality sets in.

[Thanks to conspec-controls.com for the photo.]

For the uninitiated, the control of the issuance of money has always been a power and source of wealth that governments have craved. They have given themselves this monopolistic power and wealth in past centuries on many occasions.

Indeed, over the past 100 years, the world has given the US much of that monopolistic power and wealth by turning the US dollar into a global reserve currency and imposing its use in ground-level transactions in world markets for the pricing of fundamental products like oil, diamonds, and gold itself.

But the world may be changing it's mind. The dollar is no longer "as good as gold." This is normal. Governments have only managed to preserve their nation's unit's purchasing power over time when they have disciplined themselves by tying its exchange value to something like gold or silver, things that have "intrinsic" value, i.e. something people would care to hold or obtain under almost any but the most desperate circumstances.

Today, as has happened in the past, there is no such fixed exchange standard. Instead, the markets now determine the exchange value of our money, and the governments control the quantity of it by what is called "fiat," issuing it as they see fit.

This is dangerous in the long run.

Reason No. 1: Money is not a commodity. It is not something that has a "market value," like oil, Chinese dolls, or chocolate. It is a contract between two parties, something my Dad, a little-known economist named E.C. Harwood, used to call "a promise to pay," or a "warehouse receipt" of sorts. As such, it is not subject to market evaluation, except under deceptive circumstances.

Reason No. 2: Governments have always failed to maintain their monetary unit's purchasing power over time under such a fiat unstandardized regime.

What is worse, the decline in purchasing power doesn't always happen smoothly, or imperceptibly. At times, the decline is abrupt and disruptive. The recent decline in the exchange value of the dollar is an example of such a disruptive decline, losing as some claim up to 73 percent of its exchange value over the past 39 years. (I recommend consulting Michael Hodges's Grandfather Economic Report for a clear explanation of our present US financial woes and how we got here.)

Another well-regarded newspaper, the Wall Street Journal, published yesterday an opinion piece by David Malpass, chief economist at Bear Stearns, of all places--I say that because we all assume that most of the finance houses would be advocating a loosening of monetary policy, whereas Mr. Malpass says, "the clear alternative [to more rate cuts] is to strengthen the dollar first" presumably by tightening monetary policy, although he doesn't give any blueprint.

This is a most interesting fulcrum moment in US monetary history. Bernanke's Fed will find it nearly impossible to strengthen the dollar through tightening, especially in the upcoming news environment that is already beginning to harp upon recession fears.

Which is good for gold, in the middle run. Short and long are another matter, because they depend on what the US Fed will do from here on in.

Labels: , , ,

Thursday, January 10, 2008

Taking a Look at All That's Broken

David Wessel has a great piece today in today's Wall Street Journal, enumerating the ways "the business model for big U.S. banks is broken."

[Thanks to photographer Alana and travelblog.org for the photo.]

He lists three: (1) The ever-ingenious ways lenders have found to distance themselves from risk; (2) the fragility of the financing world's computer modeling technology; and (3) the disintegration of the reliability of the rating agencies. His solutions are a mix of more evolved regulation and self-correction.

I add to his mix that maybe the banking model is not the only thing broken and contributing to our present woes. What about the world's fiat monetary system?

Bernanke today gave a speech about future Fed intentions, reassuring the markets that they will lower the interest rate when and as necessary. At the same time, he is frank about the Board's inability to predict a recession.

He tells a great story about his own experience at the NBER (National Bureau of Economic Research), the entity that actually has the authority to declare recessions official. He tells us the truth: In sum, that economic statistics are an after-the-fact science.

This is a major admission on his part, and I applaud his openness. In sum, he has (correctly) declared economics to be an immature science, and that trying to predict the future is pointless--which pretty much eliminates the Fed's raison d'etre.

Greg Ip, the author of a WSJ article today on this subject, points out that Bernanke's position at NBER upon his departure went to a couple of economists, Christina and David Romer, who have just come out with negative press about the Bernanke Fed's proposal to publish the Fed's economic forecast more often--which intention, by the way, is another laudable effort by the Fed to be more transparent.

The Romers claim, according to Brian Blackstone at the WSJ, that such forecasts are of little use because, among other reasons, the Fed makes forecast decisions that do not conform to its own staff's data.

Ip points out that even the Romers' theory itself is challenged by other researchers, i.e. that even their criticism is not supported by all the evidence.

My conclusion here again? Economics does not support the Fed's raison d'etre. In fact, it barely supports it's own.

In another Ip article giving an excerpt from Bernanke's speech, we read that Bernanke says that "'any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate' its job in the future."

This reminds us that the Fed's actions depend not just on flaky statistics, but also upon the Fed Governors' interpretation of something as vague as public "expectations." How fuzzy-wuzzy is that as a statistical indicator?

I don't feel guilty about bringing to the attention of my readers that the Fed model is also broken, even if in doing so I'm contributing to those dangerous "expectations" and to Fed credibility "erosion." It just takes an honest, well-meaning fellow like Bernanke to admit it, that's all. The Fed's credibility is flawed because its modus operandi is flawed--indeed, has been since 1913, the Fed's birth day; and it's high time we all admitted it and came to grips with it.

We need to get through this mess as best we can, and then let the market take over from the Fed and invent a new way to stabilize interest rates, employment and prices.

Labels: , , ,

Tuesday, January 08, 2008

Correct Predictors of 1929 Depression

My Dad, E.C. Harwood, is getting some long-overdue credit in this article by Gerald Jackson of Brookesnews.com for having predicted the 1929 depression, and for being one of the few who did.

[Thanks to AIER for the photo.]

Yes indeed, there still exist volumes containing the letters he wrote to various periodicals of the day, plus his exchanges with Keynes on the subject. Those interested in finding out more about this interesting economist should go to the site of the economic research organization he founded. I recommend also a booklet called "Keynes vs. Harwood--a Contribution to Current Debate" by Professor Jagdish Mehra, who was at Youngstown State University at the time (and perhaps still is). The book is available through their website.

Personal note: In Mr. Jackson's article, I learn for the first time of the existence of another organization back then, the Austrian Institute for Economic Research. I wonder if my Dad was inspired by this name to call his the American Institute for Economic Research. I wouldn't be surprised, because his views definitely coincide with some emanating from the Austrian School, and he was more than just a casual acquaintance of Professor Hayek.

Labels: , , , , ,

The Market's Mixed Messages

The inquiring public is getting bombarded from all sides from the financial pundits about where our future economic stability is headed. It drives me to drink.

[Thanks to thefreedictionary.com for the image.]

I don't know about you, but I'm sick of reading one day that the housing slow-down is bottoming out, and the next that it has just begun; that the Fed must lower rates to combat the coming recession, and then that it must not do so because of signs of rising inflation; that the credit crunch is winding down now that the huge financial houses have admitted some of their shortcomings by writing off a few billion each, and then that the credit earthquake has only begun; that Countrywide is fine, and then no, maybe it's going bankrupt; that GDP will slow only slightly this year, and then that the government must find ways of halting the coming recessionary carnage.

Make up your minds, folks. Stop whipping us around. Shut up, for once.

All this makes me realize that we'd be a lot better off: (1) if the government were too small to do anything about this crisis; (2) if Countrywide had declared Chapter 11 many months ago instead of borrowing money from Bank of America and the Federal Home Loan Bank (i.e. you and me); (3) if the Fed had no hands on interest rates or "monetary equilibrium," but instead concentrated on maintaining the clearing house aspect of their job and on protecting the consumer through education and oversight; (4) if we Americans got a little religion about credit and how to manage it, how not to live above our means, and how to save instead of spend ourselves into trouble; (5) if we Americans stopped having faith in politicians and pseudo-scholars to cure all our ills, but instead simply studied the intent of those who wrote the Constitution; (6) if gold could be used as legal tender.

Thank goodness I've got my sedative: I relax just watching the metal as it shines. Once again, folks:

You can take gold out of the standard, but you can't take the standard out of gold.

Okay, it may turn into a bubble, but it's always the last bubble, and the biggest one before we move into the inebriate's perennial hangover mode.

Labels: , , ,

Friday, January 04, 2008

The "Velib" Saga Continues

So, just as these environment-friendly, state-sponsored bicycles were becoming popular around various cities in France and elsewhere--"Boom"-- they run into France's newly flourishing private-sector capitalism.

[Thanks to Guy Brighton for this photo.]

To bring the uninformed up to date, last year the City of Paris, like several other communities around Europe and elsewhere, decided to make a deal with a French publicist named J.C. Decaux, to place hundreds of bicycle stations around the city and to make available thousands of bicycles for hourly or daily use by the citizens. For more details, see this post, that has links to the whole history.

J.C. Decaux is a powerful man in the world, inasmuch as he controls many of those billboards, subway stations and publicity stalls you see around Paris and many other cities. In the US, his rival is Clear Channel, the name you've probably seen on many of our own signs.

According to an interview with him, he loves biking and just wants to see everyone get a little exercise. The truth, however, is that he has a huge financial interest in getting monopoly access to thousands of City-paid publicity spaces, a privilege only he will enjoy in the City of Lights.

Along comes Clear Channel (CC), that has been making some exploratory inroads into French media and other venues. J.C.'s success--in obtaining at the city of Paris's expense prime space for publicity signage--did not go unnoticed to CC.

As soon as the Parisian project started to gird its loins for the second phase, i.e. for the extension of the idea into Paris's suburbs, CC found a way to intervene by persuading an administrative judge to stop it in its tracks.

I applaud this endeavor, if only because this is a first in history. No one, as far as I know, has ever challenged a state or city's right to offer services to its citizens, especially in France. But the cronyism is so blatant here, the opportunity for profit so obvious, and the opposition so strong, that even a powerful French municipality will have to put up a good fight.

The motive given for the judgment: The extension of the Parisian plan to other communities is of such a nature as to "modify the intent of the initial contract" inasmuch as "it would have the effect of furnishing a public service through a self-service mechanism." [Note: This is my approximate but unclear translation that made need some tweaking.]

As explained in this article and this one at the La Liberation French newspaper, "the initial contract drawn up between JC Decaux and the City of Paris cannot be extended without contravening principles of open competition."

In the December 19 agreement reached between the City of Paris and the outlying municipalities, Paris would have paid for the installation of the new Velib stations in the suburbs, and in exchange they would have received 100 percent of the income.

Further complicating all of this is a desire in the heart of some Parisian politicians to develop a kind of Uber-Paris community in which they, presumably, would become the power-players.

Now it is up to the State Council to decide. This should be fun.

PS: What, you ask, is the State Council? It's an unusual, archaic-sounding government tool unknown in the US, that the French have conserved over the centuries. It has an advisory capacity, an honorary status, and both an administrative function and a judicial function. For more information, see this Wikipedia entry.

Labels: ,

Thursday, January 03, 2008

Gold: Not Such a Barbarous Relic After All

Anyone who has read my posts for a while knows what I think about gold, for example here, here, and here for the three most recent examples.

[Thanks to Kitco.com for the snapshot of gold's rise to $868 today. Click on the image for a larger version.]

I guess I'll once again give you my mantra, because it always bears repeating:

You can take the gold out of the standard, but you can't take the standard out of gold.

For the uninitiated, let me explain. For several centuries, your money was closely linked to gold, and governments helped to maintain its exchange value. Today, this is no longer the case, and your dollars and your pounds and your euros, yen, or whatever, are floating on an international exchange market with nothing to tie them to anything of value except market competition.

As an aside, economic theory states that markets should be free to determine the value of things; but economists make a huge mistake when they proclaim that money is such a thing, a commodity that will be controlled by a market.

Money is not a thing of relative value. It is an intangible, a kind of contract, a promise to pay; and a promise to pay is no longer a promise if its value is allowed to fluctuate or fade away. It's the equivalent of saying that the length of an inch is determined by the market. This is nonsense. But I digress; I will discuss this idea in some other post.

Today, I'm watching the Kitco gold price reach, maintain and beat its last all-time nominal record of $850. As I do so, I can't help but remember Keynes's famous quip about the gold standard being a "barbarous relic." I looked up the exact phrase in a search engine, and I fell upon this great piece by James Turk. It's about the role of gold, the "relic" quip, and the future of the dollar.

Turk makes one of the best cases I've ever seen for allowing gold back into some role as currency, if only as a parallel means of exchange to the fiat ones we have at our disposal presently.

He worries me, however.

His ideas are right on. He points out that it was the gold standard, and not gold itself, that was the true object of Keynes's scorn; and he correctly blames the central banks of the world for our current financial turmoil, because of their --most hypocritical-- intervention in the money markets in a futile effort to control prices and the economy.

The fact that they cannot succeed at this mission, for reasons I have mentioned here, seems not to concern them; nor does their role in assuring that the dollar will follow all its fiat predecessors down the drain of monetary history. Perhaps they console themselves with the idea that the dollar will not be alone.

But Turk worries me not because I think he's wrong; he worries me because I think he's right, and because his wonderful idea of using gold as a means of exchange and as currency (i.e. as legal tender, although he seems to be carefully avoiding that expression), could get him into trouble. Why? Because he is striking too close to home: He is jeopardizing the very existence of the central banks.

Merely reinstating gold as legal tender (see his website) would go a very long way to solve many of the monetary problems we have run into of late--things like the current account deficit, the government's own budget deficit, and the waste and damages incurred by currency and asset price speculation of the kind that got us into the housing and credit market messes.

Personally I think simply allowing gold use as payment of debts public and private would demonstrate to an important minority of the world's population (i.e. the balance-of-power minority) that gold works better than paper money, and after an initial adjustment period, it might even displace our fiat currencies.

But it would also make clear to everyone just how much governments and speculators profit from the fiat currency machine, and governments don't like to be caught doing that. Look what happened to Bernard von NotHaus and his Liberty Dollar?

Mr. Turk, keep your eyes and ears open for the guys and gals in those somber jackets with the lettering on the back. The central establishment is not going to like you if it turns out your predictions about the dollar are correct.

As to where gold is headed, we must look at the inflation-adjusted charts for the real gold price over the years. In 1980, gold hit $850. In today's dollars that is something like $2,100. (See the chart here, and another one here.)

We are nowhere near the 1980 gold peak (or the dollar trough, if you prefer), because back then the 1970s inflationary crisis and abandonment of the gold standard had an explosive effect on the speculative price of the metal (and/or on the speculative loss of value of the then dollar).

What we might call the "real price of gold" (i.e. the real gold value of the dollar), once all is said and done, will probably be, grosso modo, (1) something between $600 and $1,000, assuming the dollar retains its reserve currency status. This, however, is becoming less and less of a sure thing.

If the dollar loses that status, then (2) the real value of the dollar will likely be somewhere between $1,500 and $3,000 an ounce of gold, at present gold supplies. (For an explanation of these figures, see the fascinating booklet entitled "Prospects for a Resumption of the Gold Standard," a collection of essays from a conference at the American Institute for Economic Research in 2004.)

Labels: , , , ,