A few days ago was the last call for entries to the Wolfson economics Prize. I'd quite like to have entered but I didn't really find out about it in time to put together a decent offering. So here's the short version of my plan for how you can unwind the Euro.
With all the problems faced by the country and financial contraction, capital flowing out, all of those very damaging things, the Greek economy will soon be an inch from death. The way to reverse that trend is to make Greece suddenly the best place in the world to do business. Austerity will do the exact opposite of that (even the IMF, which insisted on austerity in the first place, is saying that), as will the flight of the Greek people out of Greece. If Greece simply adopts its own currency then there will be a run on that currency as every Greek moves his or her money out of the country to keep it safe from inflation. The inevitable result is hyperinflation, according to the theory I put forth in earlier blog posts. There is a way around all of this and it's going to sound really weird to most economists. You don't actually have to abolish the Euro at all. That brings me neatly to my plan of action.
Phase 1: Introduce competition
Currency competition, that is. The only reason the Euro is used at all is that it's illegal to use anything else. If you lifted that restriction without providing an alternative then the market would bring in gold and silver money. This is the reverse mode of Gresham's Law. I don't even mind if they use the exact same trimetallic system I talked about in an earlier post. This money would not require legal tender status because everyone would accept it without government fiat. The process of adoption could be greatly accelerated by waiving taxes on transactions using any currency other than the Euro, although I doubt this incentive would be needed. The market will take care of all minting, changing of coin operated machines of all kinds and so on without any need for government money. The parallel currency would soften the transition away from the Euro because of the buffer effect of the limits of the rate of flow of new money into Greece. The equipment to mint the large number of coins required for commerce would not spring up overnight, and the rate of minting is also limited by how quickly gold and silver may be transported into Greece. Due to the popularity of the new money it would greatly increase the prices of gold and silver in Greece with respect to the Euro, and thereby in the rest of the world through international trade. Euros would flow out and precious metals in, supplanting the supply of Euros in a seamless transition while commerce suffers no negative effects.
Phase 2: Bonds
The spike in gold price caused by its restoration to money status will make early adopters immensely wealthy, increasing the adoption of gold as currency and flushing the Euro out of the country. The government would know all this and should therefore start with a substantial gold position, selling it to the populace in exchange for their Euros. The rise of gold price will allow the government to sell at ever greater prices and extract enough Euros out of the Greeks to pay down the bonds. Again this will not interfere in commerce in a negative sense. The government would buy back all Euro denominated bonds issued in the market and simply cancel those held by the central bank, thus eliminating its foreign debt. The brief was to have all parties happy, but this is simply impossible. Currently banks and stock markets are living off the hard work of ordinary people, and this has to stop. It necessitates a transfer of capital from the inflated stockmarkets, bloated government balance sheets, and other bubble assets back to the average citizen - capital which rightfully belongs to those that earn it. However this will no doubt enrage those for whom the party is over and whose speculation has to find avenues in less enlightened countries. Those institutions that benefited under the debt monetisation fraud must necessarily suffer the most when such schemes are unwound. That is simply justice.
Government finance during Phase 2
The initial gold position of the Greek government is crucial for maintaining solvency throughout the most turbulent transitions of phase two. The Euros they obtain by selling gold to the Greek people will serve not only to buy more gold on foreign exchange and eliminate the bonds but to enable the continuity of certain government services, namely police and infrastructure. This period of probably half a year must be funded entirely by the appreciation in the price of gold with respect to the Euro, so the government should act shrewdly in when it chooses to start selling its gold. By the end it should have no permanent store of gold but for an emergency fund of gold currency and that required for the day to day running of government business, funded entirely by tax revenue. Its revenue must then remain neutral.
Phase 3: The Greek Euro
Phase three will happen naturally. Either the Greek government will see reason and end parity with other Euro currency or the governments of all other nations will stop accepting Greek currency at parity. The latter is more likely given the Greek government's incentive to keep the currency at parity to allow rapid debt payment. At this point the Greek Euro will experience a rapid drop in value. Hyperinflation of the Greek Euro will occur, but this time it won't hurt anyone since most people will already be using specie currency. The economy will be intact. On the same day that parity is canceled, the Greek government would start requiring taxes in the new specie currency. Its tax rate would be very low to begin with, say 5% flat income tax, in order to promote growth. Most of the non essential government staff would have left the public sector because their Greek Euro denominated salaries would have been losing value.
Phase 4: Exit the Euro
Yep, it really is that simple. Once the specie money has pretty well totally displaced the old Euro currency, all that is left is for the Greek government and central bank to say, well, we tried but the people didn't want the Euro, sorry, and stop issuing it. They can then munch up all the old currency in shredders and save a few notes to sell to collectors some years on to remind everyone of the bad old days.
Impact on other Eurozone countries
Phase 1 will lead to some substantial appreciation of the price of gold and silver as the Greek people stop accepting Euros so they don't have to pay tax. The Euro money supply of Greece will disperse into neighbouring countries if they are still accepting the Greek currency, and be absorbed by Greek banks if not. Germany, China, US, India and other countries with large gold positions would gain substantial boosts to their wealth as gold returned to its monetary use in Greece. Needless to say, this effect would be compounded multiply if many countries went a similar way.
Phase 2 would have a slight negative effect on banks but as it will be relatively gradual the effect would be time dissipated. Bond buybacks would continue throughout the initial adjustment period. Most Greek bonds are held by banks, central or otherwise, which can absorb the drop in the value of those bonds. Greece herself would be unaffected by the huge spike in yield because she would no longer be issuing any new bonds. In fact, the yield spike would make it all the easier to buy the debt. Some pension funds also hold Euro denominated Greek debt, and as a result some people would suffer loss there but it is a relatively small amount. If a country such as the US decided to return to the PM standard in this way many investors would be wiped out as US Treasuries fell in value. This is an unfortunate but unavoidable step in the move back to sound money. It cannot be guaranteed that all those that benefited from inflation will suffer in deflation, as would justly be the case.
During Phase 3 the transition will be largely complete and there will be no one left to complain of hyperinflation. Taxes would begin to flow back to a public sector composed of only very few people. With the econonmy back in balance and very likely booming hugely the government could return to the business of providing a police force and certain utilities.
Phase 4 would have minimal effects, it is merely a technical end to the Euro era for Greece.
In summary, this method of exiting a debt monetised fiat currency is most likely the only way of smoothly transitioning out of such a currency, or as smooth as a currency transition can be. There is no way of making such a massive change without short changing some people along the way, but my favoured method is to allow the market to clear, withdraw government influence from currency, and all of Austrian theory says that the result will be the most equitable transition possible. The new currency is in fact a by-product of allowing people to choose how they buy and sell, and what they use to buy and sell. This makes it the most liberal of all possible schemes, and where liberty and justice thrive, wealth is sure to follow.
Wednesday, 18 January 2012
Sunday, 8 January 2012
Unemployment theory
No, don't "turn over", you'll like it.
Recently I've been thinking about the causes of unemployment. I don't know a lot about the Austrian perspective on it, but no doubt there has been someone who has developed it. I want to come up with some ideas and see how they stack up.
The modern economists view inflation and unemployment as irreconcilable goals, since they believe that lowering inflation will increase uneployment and vice versa. Whether or not this is true under MMT I leave to other more capable minds than mine, but it does sort of make sense that if interest rates are high to keep inflation low then there is less money available for discretionary purchases and so you could see some short term unemployment shock.
Before we get into the details of what causes unemployment, however, it is enlightening to examine what situation would result in full employment. Firstly, I will consider such an economy as has a market money system, so forget about central banks and fractional reserves.
In a market economy everyone acts as an entrepreneur in every market transaction. All people are considering whether if they engage in a certain trade they will end up with more wealth than before. If the answer is yes, they trade, if not, they don't. Whether they have acted as a good entrepreneur is answered by whether they actually do end up with more wealth after the exchange than before. As I have mentioned previously, wealth is highly subjective and cannot be measured, so the only person who can know this is the one who made the trade. Money profit is easier to measure but it's only a small part of the picture. People donate money to charity not because they think they will receive something of cash value in return but because they have compassion for the needs of others and they feel better about being wealthy when others are not if they give some away.
In the same way, whenever someone is looking for work they are also acting as an entrepreneur. All people always want more goods and services, so it is impossible that there are simply no jobs available in the economy. It is simply foolish to say that jobs are "created" or "destroyed". Demand for labour flows from one region of the economy to another, but there is always infinite demand for labour and only a finite supply, and all regions of the economy always have infinite demand for it, so the prices for the labour control where it goes. When someone looks for work they are proposing to trade their labour for some price. If the utility of their labour is expected to be in some way low then they will usually get a low price for it. If it is high then they may demand high wages.
Now that we have some grip of the basics we can start to talk about unemployment. Firstly, unemployment is theoretically impossible. That is to say, there is always infinite demand for labour so how is it that anyone would ever be unemployed?
If the expected utility of someone's labour is very low then they might not be able to command wages even as low as the minimum wage, so in that case unemployment is the result of the minimum wage price control. So we have fact number one:
1. Minimum wage laws produce unemployment.
Now let us say that the Austrian view of the business cycle is broadly correct. In this case, when the economy shifts from high gear to low gear, there is a sudden drop in relative demand for labour in certain sectors of the economy, formerly booming. As a result those workers have to take a large drop in salary because the utility of their labour has become low, or there have to be layoffs. Fortunately for those driven below the breadline or the minimum wage line, there is always infinite demand for labour so they can move into other sectors of the economy. But now we have a problem, you see, because those people who were formerly skilled are now unskilled, so they have a low utility of labour and consequently low wages. Some might be only prepared to accept the same wages as before, until they capitulate, and this will also result in unemployment. Further, some jobs require years of training and this is usually chosen because of expected future demand in that sector. If someone trains as a civil engineer and an economic downturn puts construction on hold they will not be able to break into that labour market. As a result we can say that business cycles are responsible for unemployment, and since they in turn are caused by interest rate manipulation, we can say:
2. Interest rate manipulation causes unemployment.
We're not quite done with interest rates either, since there's something very few people know about them: they are a tax. Consider what the central bank in any country does if inflation is getting high: they increase interest rates. They way they do this is by decreasing availability of bank reserves by some boring way you needn't bother about. When they do this the cost of lending goes up for banks and the money creating process slows. In turn, banks increase their interest rates to encourage people to save and to make sure they stay profitable. There's one big fly in the ointment, though, and it's variable rate home loans. When interest rates go up these people's disposable income goes down, since more is needed to pay the bank because the banks costs have been increased by the central bank. As a result of this process, money is extracted from home loan payers and goes to the central bank, where the profit is sent to the government. In other words, interest rate changes are changes in a tax rate.
What has this to do with unemployment, I hear you ask? Well I am glad you asked because I now come to the third cause of unemployment. Any tax on the income of a business will cause that business to have to grow more slowly. Slower growth by definition means that it will be able to employ people only at a slower rate. This reduction in the rate of employee uptake can also cause people to stop working or move to sectors where they have little skill. Furthermore, individual income tax also reduces the rate of growth of business because it removes money available for discretionary spending that might have been spent on consumer goods. Thus we come to number three:
3. Taxes cause unemployment.
In fact, anything that distorts the economy, makes it hard to predict or extracts wealth from it will cause unemployment in some measure. And let's not forget what happens to the wealth extracted from the economy: a large part of it is given to the unemployed. This might seem like a great thing but in fact it lessens their desire to get a job again. This disincentive to work is at the heart of number four:
4. Unemployment benefits cause unemployment.
These four things - where do they come from? Are they produced by the market? Well, no. All of these are laws, functions or impositions of government, by government, for government. So we can create a new statement zero about unemployment:
0. State interference in the market causes unemployment.
Still think Obama's jobs plan might have worked?
Recently I've been thinking about the causes of unemployment. I don't know a lot about the Austrian perspective on it, but no doubt there has been someone who has developed it. I want to come up with some ideas and see how they stack up.
The modern economists view inflation and unemployment as irreconcilable goals, since they believe that lowering inflation will increase uneployment and vice versa. Whether or not this is true under MMT I leave to other more capable minds than mine, but it does sort of make sense that if interest rates are high to keep inflation low then there is less money available for discretionary purchases and so you could see some short term unemployment shock.
Before we get into the details of what causes unemployment, however, it is enlightening to examine what situation would result in full employment. Firstly, I will consider such an economy as has a market money system, so forget about central banks and fractional reserves.
In a market economy everyone acts as an entrepreneur in every market transaction. All people are considering whether if they engage in a certain trade they will end up with more wealth than before. If the answer is yes, they trade, if not, they don't. Whether they have acted as a good entrepreneur is answered by whether they actually do end up with more wealth after the exchange than before. As I have mentioned previously, wealth is highly subjective and cannot be measured, so the only person who can know this is the one who made the trade. Money profit is easier to measure but it's only a small part of the picture. People donate money to charity not because they think they will receive something of cash value in return but because they have compassion for the needs of others and they feel better about being wealthy when others are not if they give some away.
In the same way, whenever someone is looking for work they are also acting as an entrepreneur. All people always want more goods and services, so it is impossible that there are simply no jobs available in the economy. It is simply foolish to say that jobs are "created" or "destroyed". Demand for labour flows from one region of the economy to another, but there is always infinite demand for labour and only a finite supply, and all regions of the economy always have infinite demand for it, so the prices for the labour control where it goes. When someone looks for work they are proposing to trade their labour for some price. If the utility of their labour is expected to be in some way low then they will usually get a low price for it. If it is high then they may demand high wages.
Now that we have some grip of the basics we can start to talk about unemployment. Firstly, unemployment is theoretically impossible. That is to say, there is always infinite demand for labour so how is it that anyone would ever be unemployed?
If the expected utility of someone's labour is very low then they might not be able to command wages even as low as the minimum wage, so in that case unemployment is the result of the minimum wage price control. So we have fact number one:
1. Minimum wage laws produce unemployment.
Now let us say that the Austrian view of the business cycle is broadly correct. In this case, when the economy shifts from high gear to low gear, there is a sudden drop in relative demand for labour in certain sectors of the economy, formerly booming. As a result those workers have to take a large drop in salary because the utility of their labour has become low, or there have to be layoffs. Fortunately for those driven below the breadline or the minimum wage line, there is always infinite demand for labour so they can move into other sectors of the economy. But now we have a problem, you see, because those people who were formerly skilled are now unskilled, so they have a low utility of labour and consequently low wages. Some might be only prepared to accept the same wages as before, until they capitulate, and this will also result in unemployment. Further, some jobs require years of training and this is usually chosen because of expected future demand in that sector. If someone trains as a civil engineer and an economic downturn puts construction on hold they will not be able to break into that labour market. As a result we can say that business cycles are responsible for unemployment, and since they in turn are caused by interest rate manipulation, we can say:
2. Interest rate manipulation causes unemployment.
We're not quite done with interest rates either, since there's something very few people know about them: they are a tax. Consider what the central bank in any country does if inflation is getting high: they increase interest rates. They way they do this is by decreasing availability of bank reserves by some boring way you needn't bother about. When they do this the cost of lending goes up for banks and the money creating process slows. In turn, banks increase their interest rates to encourage people to save and to make sure they stay profitable. There's one big fly in the ointment, though, and it's variable rate home loans. When interest rates go up these people's disposable income goes down, since more is needed to pay the bank because the banks costs have been increased by the central bank. As a result of this process, money is extracted from home loan payers and goes to the central bank, where the profit is sent to the government. In other words, interest rate changes are changes in a tax rate.
What has this to do with unemployment, I hear you ask? Well I am glad you asked because I now come to the third cause of unemployment. Any tax on the income of a business will cause that business to have to grow more slowly. Slower growth by definition means that it will be able to employ people only at a slower rate. This reduction in the rate of employee uptake can also cause people to stop working or move to sectors where they have little skill. Furthermore, individual income tax also reduces the rate of growth of business because it removes money available for discretionary spending that might have been spent on consumer goods. Thus we come to number three:
3. Taxes cause unemployment.
In fact, anything that distorts the economy, makes it hard to predict or extracts wealth from it will cause unemployment in some measure. And let's not forget what happens to the wealth extracted from the economy: a large part of it is given to the unemployed. This might seem like a great thing but in fact it lessens their desire to get a job again. This disincentive to work is at the heart of number four:
4. Unemployment benefits cause unemployment.
These four things - where do they come from? Are they produced by the market? Well, no. All of these are laws, functions or impositions of government, by government, for government. So we can create a new statement zero about unemployment:
0. State interference in the market causes unemployment.
Still think Obama's jobs plan might have worked?
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