Monday, 17 August 2015

“While government power can increase monetary volume, it cannot enhance monetary value.”

Over the weekend I was recommended a great wee monograph by former Friedman collaborator George Gilder, which makes, as the title says, a 21st Century Case for Gold.

Frankly, the case as Gilder makes it is frustratingly shallow (a gee-whiz mishmash of the ancient labour theory of value and up-to-the-minute cybernetics), but his criticism of the monetarist mainstream who have delivered us monetary mayhem is dead on:

imageThis essay explains why monetary policy has not prevented the greatest recession since 1930 and is contributing even today to starving the real economy of the capital it needs to grow jobs and wages for the middle class.
    Both conservative and liberal economists who support the monetary status quo are operating from a false theory of money. Milton Friedman, who may have been the most formidable 20th century economist, coined the heart of the theory of money that is driving Quantitative Easing (QE) around the world despite no evidence of economic effectiveness.
    But in his later days, Friedman retreated from his original analysis. And, in any case, Friedman is the last man who would want his ideas to turn into dogmas, protected from empirical critique…
    Manipulating the value of money, whether by printing currency or artificially suppressing interest rates, does not create wealth. Instead, it is the equivalent of manipulating the data of a scientific experiment after it takes place, distorting the information economic actors need to create new wealth. Understanding the new economic paradigm of information theory leads us to recognize that inflation is only one of many bad economic results of monetary policy that distorts the value of money.
    When central banks and governments manipulate interest rates and currency values, we do not necessarily have hyperinflation. Instead, the current Federal Reserve policies have turned Wall Street investment banks into subsidiaries of the government that make money not through entrepreneurial risk-taking but through
government wealth shuffling. By bidding up the value of current assets with government debt and inhibiting the creation of new assets, existing policies stifle growth and portend new crises. Youth unemployment climbs above 25 percent. Amid theories of “secular stagnation,” new high-technology businesses languish without access to the Initial Public Offering (IPO) market and angle to be absorbed by bloated rivals. By most measures, workers have not received a real raise since 1993.
    Meanwhile, Wall Street bank profits, effectively guaranteed by government policy, return to previous highs. Currency trading to  set the measuring stick of monetary values yields a hypertrophy of finance. Transacting $5.4 trillion every twenty-four hours, foreign exchange markets are now scores of times larger and even more volatile than the markets for real goods and services that they are supposed to measure. Rather than promoting enterprise, banks
harvest the profits of currency changes, imposing a volatility toll on businesses that have to hedge all their activities against the chaos of floating moneys…
    While government power can increase monetary volume, it cannot enhance monetary value.

True that.


  1. A good, quick read. Yes, a mish-mash -- though not sure where you saw the labour theory of value. Lots of interesting insights & reminders of why sound money works, and why manipulated money can't. The insight that money has become the message, rather than messenger is clarifying.

    1. "...not sure where you saw the labour theory of value"? Well, he's looking for an unchanging yardstick by which to measure either economic value or economic activity--which doesn't exist--which was exactly the same motivation that created the labour theory of value. And what he alights on is that gold is a measure of the *time* taken to extract it: and bingo, there we are again.


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