Monday, December 29, 2008

On Globalism & the NBER yeild Curve

Paul Krugman's blog on the NBER yeild curve brought out a libertarian response that claimed that in the postwar period, a postive yeild curve *always* meant a recovery was coming.

I think the good Professor did a great job explaining why this isn't so- New Deal Democrat also pointed out at economic populist that the NBER yeild curve reports different data under deflationary periods than under inflationary periods.

Postwar predictions are therefore not valid- this is the first *deflationary* recession in the postwar period, so you need to look at PREWAR conditions, not postwar conditions, for any of this to make sense. Thus, at least on the matter of stimulus vs doing nothing, I’m with the good professor. I simply disagree that stimulus *alone* will be enough. A global “free trade” economy is literally an economy without scarcity- anybody can have anything for far cheaper than they could yesterday or last week, and the prices keep falling.  Demand simply cannot keep up with worldwide supply where half the world works for under $2/day, the workers aren't earning enough to become consumers.

Thus I argue that we need to separate the uses of money better- into four worldwide currencies:

- Currency A is a value store- it defines the value of the other three currencies, and you can only transfer wealth in one currency to another through Currency A, but you can’t charge or receive interest in Currency A.

- Currency B is for Business Cash Flow, and as such, has an expiration date, use it or lose it. MOST people and companies will get their paychecks in Currency B, and pay their bills in Currency B, and it will expire at the end of the fiscal year if not converted to Currency A.

- Currency C is for Credit. You can borrow Currency C, but it must be changed to Currency A to be converted to B or D, and you pay interest on borrowing it. Currency C’s interest rate is fixed, pegged at time of borrowing at CPI-1% to prevent usury. Currency C is Secured Debt- you need some collateral to get it- and is cosigned by the government, much like FDIC does with your bank account today, to prevent loss. HOWEVER, fractional reserve banking will no longer be allowed- a bank will NOT be able to lend out more money than it has on hand.

- Currency D is Debt Gambling. Currency D is the chips you get in exchange for currency A at the casino, or the stocks you get in exchange for currency A at the stock market, or the bonds you get for currency A at the bond market. Currency D is only used by gamblers. On the plus side, you might win big- but on the minus side, you might lose everything. The purpose of Currency D? To remove the effects of gambling from Currencies A and B. Currency A money paid for Currency D usually becomes some form of Currency A money exchanged for Currency C.

We already have Currency A, B, C, and D in our society- but by requiring all conversions to go through currency A, this gives us control over the Bubbles. Also, in the current form, we're kind of missing a real currency A- and as this article suggests the search for currency A quality investments was a big cause of the credit bubble.


mercedo said...

We have a point system, a shop gives us points that can convert into money to buy goods at the shop that issued and also it has expiration date. This is a new currency.

Regional currencies are only valid in each country. This is a metro money in a sense.

In recession we start thinking protectionist views as block economy and it led to war in the past.

Plus don't forget the Gresham's law - bad money drives out good. Money plays an important role on medium of exchange only because it has fair values.

You see a point system, metro money, and block economy - all are against the Gresham's law.

Ted Seeber said...

The problem with Gresham's Law, like most economic theories today, is that it was created in a world of scarcity. A global economy without protectionism is not a system of scarcity, it's a system of mismatched production and usage.

At worst, in a global economy, you might end up with demand exceeding PRODUCTION- but you will NEVER end up with demand exceeding SUPPLY.

Due to this, we have two real choices: We can either bring the economy back to a point where our economic theories work with extreme protectionism; OR we can change our theories to fit the new reality.

The first is a religious attack on the problem, the second is a scientific attack.

But both will result, in the long run, in protectionism of some sort, for that is the only way to protect jobs in a culture of abundance.

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