which is that the purchasing power of money (ppm) in every country remains constant relative to each other.
I thought he made the case that was the wrong way to base things and that is what gave rise to extreme left/right political regimes in various nations - that instead we need to base it on wages remaining stable - not currency purchasing power? Therefore more people stay employed and social chaos is reduced. Wages will not go down but the currency will in regards to purchasing power in the global market - workers wont be upset as much and form labor unions because thier wages are going down and try to get the politicos to erect trade barriers. China has a peg - this defeats currency fluctuations helping the workers - as her currency got stronger and ours weaker - wages and jobs would not be shifting so fast perhaps - more tempered transition. The way it is now - I hear workers are getting pissed off - and getting senator schumer to introduce trade barrier legislation - same as happened in the depression era.
Look at what Kessler states: Success from selling $15 shirts for $5 meant gold moved into England, increasing money supply, and causing inflation.
Right, they could make a shirt with a machine for 5 dollars that in other countries was costing 15 with lower productivity. People from around the world bought the 5 dollar shirts - sending Gold to england and reducing the money supply of the outside world (in gold - which the currencies were linked too) and increasing Englands money supply - and I suppose in theory causing inflation in wages of English workers because thier money supply was increasing with thier increased textile productivity relative to the world.
The inevitable increased wages theorized by the classical gold standard would make England’s goods less competitive,
Ok - as all prices went up in England from higher productivity (because they were getting all the golden money - which was fixed globally and could not be increased or decreased) - their general stuff became more expensive. You are saying productivity reduces prices - deflates them - not inflates them - OK - sitting here on my 500 dollar dell that used to be 4K I can agree - but he is taking a more macro view I think relating to a world fixed money supply relating to gold - shirts went down in price - but because the money supply relative to the rest of the world was growing very fast - the general economy had inflation.
until gold flowed out and trade was balanced.
Well if England made all the goods and services the world wanted cheaper and better - in this case textiles of 1800 - all the gold would eventually wind up in England - thereby choking off the money of everyone outside of england in time - not a good thing eh?
Above he comes to the perverse conclusion that higher productivity causes inflation!
On a gold standard that is what he is claiming - everyone sending thier GOLD - a fixed supply - to England - would eventually leave no money for the rest of the world - Englands money supply would increase with higher and higher productivity until all the rest of the world was choked out of having any money on fixed gold. At the global level - this is bad eh - you need to increase the money supply - not have it fixed. He makes the case with Hoover that if they had deficit spending - the depression would not have been so bad - Bernanke and Greenspan agree no? Not flooding the country with dollars soon enough hurt the economy. At the global level how do you flood the world with money if gold is your money? You would have to increase mining operations no? I know many gold bugs that think JUST THAT - more gold - more gold mining - but they are living in the past. Gold has no real utility today - as Kessle says:
So after all that, what I am trying to say about gold? The British had no choice. They and the rest of the world needed a “hard currency” - something rare like gold as a baseline to base their own paper currency on. The Brits were certainly not going to take French or German paper currency and trust them not to devalue it by just printing more of it. So gold was necessary.
Fine. But the classical gold standard was a huge mistake. They held the wrong thing constant. Wages were never going to go down without more than a few pissed off laborers. It was currency rates that should have floated instead of wages and domestic prices. But that would have required rooms filled with computers, human or electronic, neither of which really existed in great numbers.
But they do now!
Currency rates do float. And there are 100,000 or more computer screens on Wall Street and around the world armed by bond and currency traders that keep countries honest. Countries caught cheating see their currencies plummet, their interest rates pop and their economies slow. It is a tightly wound system.
But banks are still a problem. They profit from lending, but there is no decent mechanism to keep them from overlending. Banks are as dead as gold. Neither is any good anymore at allocating capital. Stock markets, on the other hand, are quite good at providing access to capital for great companies and starving those that have dim prospects. Banks still loan to son-in-laws!
Ask the Japanese still burdened by non-performing loans. Some argue that half of Chinese bank loans are non-performing. We don’t have to ship gold around anymore, yet gold is still considered a currency in modern international commerce. Gold is no longer the reserve of central banks, it is dollars.
And these export economies have too much dollars. They have to give it back to us (investing in our high margin companies via the stock market) else they over lend. I know it sounds crazy, but it’s the new classical “insert your species” standard. When things heat up at home, you’ve got to ship out your species, in this case dollars, and they are all going to naturally flow back into the U.S. The Japanese periodically intervene and ship dollars back here to keep the yen down. The Chinese have a peg, so excess dollars go to banks, with awful results. The Europeans are just figuring out that $1.30 to the yen doesn’t do them any good, and they need to start intervening to get the euro down. This is the new economy, gold doesn’t flow, but dollars need to, in order to keep them away from dumb bankers. On the margin, it will invest in high margin companies in the U.S., that is our margin surplus. And I’d like to get in the way of that flow!
He must think that the gold standard forced an equilibration of labor productivity, as that is the only way he can come to the conclusion that progress is penalized under a gold standard. With respect to Kessler’s example, England’s labor wages would likely rise with increased productivity, and as a result of that gold would flow into England in order to keep domestic prices constant with world prices. But this would not and could not cause inflation under a gold standard. Gold flows are very much the tail.
I agree he does not do a good job of explaining how domestic and world prices come into balance with the gold standard - perhaps he means that England had to have a gold standard - but in the world today where we try to become more and more efficient - the gold standard allowed for some misallocation that we no longer have to tolerate with more efficient markets.
the moral hazard that the other party will default on their promise. While both exchanges carry risk, moral hazard is absent from the asset exchange.
I think the point he is making is that banks are no longer the best stewards - the market of informed citizens and capitalists would be a better steward for the flow of our investments than banks. Gold was good as a relief valve before mainframes and efficient markets and world data flows and hundreds of millions of participants - but gold has no purpose today - and banks the same - its like our gubbment system - do you need a represntative to vote for you in Congress? Farmers did 200 years ago who couldn't make the trip to washington to vote - but today with the net - we all can vote directly.
Japanese Banks have loans - bad ones - non performing - still on the books - this is bad no? The moral hazard came to fruition there - the banks made a bunch of bad loans to people who did not pay back. There are good loans, and bad loans - in good times the bad loans can get too high. Greenspan is upset about GSE's not having enough regulation.
Message 22079482
DJ Greenspan Condemns House GSE Bill -3-
Greenspan said the Senate bill - originally sponsored by Republican Sens. Sununu, Elizabeth Dole of North Carolina and Chuck Hagel of Nebraska - also appropriately strengthens the capital authority of the regulator and establishes a "clear and credible" bankruptcy process for handling a failing GSE.
The House bill fails on both fronts, Greenspan said in the letter to Sununu dated Jan. 3, the day Congress returned to work from its winter break.
"But, more importantly, the House bill fails to comprehensively address the problem of systemic risks presented by the GSEs' investment portfolios," he said. "Improved regulation by itself may be insufficient and could exacerbate the potential systemic problems associated with the GSEs' large portfolios if financial markets infer from such regulation that the government is more strongly backing GSE debt."
Sununu said in a statement that Fannie and Freddie "have strayed from their housing mission.
"Chairman Greenspan has repeatedly warned that Fannie Mae and Freddie Mac have used their quasi-government status to profit from their large portfolios of mortgage backed securities. This is a risk to the long-term stability of the housing finance market and an issue that affects all American taxpayers," Sununu said.
The House bill, which passed with an overwhelming bipartisan majority in October, also faces opposition from the White House. The full Senate still has to debate its GSE bill, which passed the Senate Banking Committee on a party line vote in July.
-By Dawn Kopecki, Dow Jones Newswires; 202-862-6637; Dawn.Kopecki@dowjones.com
(END) Dow Jones Newswires
DJ Greenspan Condemns House GSE Bill As Failing On All Fronts
By Dawn Kopecki
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Outgoing Federal Reserve Chairman Alan Greenspan condemned a U.S. House bill that would overhaul Fannie Mae (FNM) and Freddie Mac's (FRE) oversight, saying that the legislation doesn't create an effective regulator nor does it minimize the broader risks the companies pose to the U.S. financial system.
"The bill that passed the House of Representatives in October 2005 neither takes the steps needed to create an effective GSE regulator nor addresses the systemic risks posed by Fannie's and Freddie's investment portfolios," Greenspan said in a letter to Sen. John Sununu, R-N.H., that the lawmaker released Thursday.
In the letter, Greenspan reiterated his and the administration's concerns that the government-sponsored enterprises' vast mortgage holdings add systemic risk to the U.S. financial system which, he said, "normal market forces are unable to resolve."
"These large portfolios, while enriching GSE shareholders, do not meaningfully benefit homeowners and do not facilitate secondary market liquidity," Greenspan said in the letter.
Greenspan, who retires at the end of this month, backed Sununu's bill in the Senate. The legislation, which was rewritten by Senate Banking Chairman Richard Shelby, R-Ala., would significantly restrict the companies' operations by requiring the new regulator to pare back their portfolio holdings to only what was needed to accomplish their mission.
Greenspan said the Senate bill provides what he called a much-needed anchor that would refocus Fannie and Freddie on their publicly chartered mission of promoting affordable housing.
Greenspan, whose views are largely shared by prospective Fed Chairman Ben Bernanke, called for "specific and unambiguous congressional guidance" on the GSEs' portfolios.
"Strong portfolio guidance by Congress is needed because GSEs are an unusual government intervention in private markets; such institutions lack the typical financial market discipline that is commonplace for other publicly traded firms," he said.
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