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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (53893)	2/16/2006 12:01:31 AM
From: basho	Read Replies (1) \| Respond to of 110194

A most enjoyable exchange of views. I wonder if the apparent differences between you and Heinz aren’t as much a reflection of your respective intellectual styles as of any serious underlying disputes. In my observation Heinz, unless heavily pressed, tends to the aphoristic and hence often sets aside some of the subtleties in the interests of a clear and colourful response. It's part of what makes him such an effective and enjoyable commentator on complex issues. From what I've read, you tend to be far more careful in your utterances. Each one is thought through and quite comprehensive. I generally quite enjoy this sort of rigour and some of your recent posts have certainly prompted me to do a bit of reflecting . . . never a bad thing! The only slight downside is an occasional whiff of condescension. Still, I suppose it nicely matches Heinz's occasional air of impatient arrogance. And, no doubt, whatever odour I unintentionally exude. Anyway, to matters of more substance. You say: "A fiat regime is entirely consistent with a free market in money." If I'm understanding you correctly, I'm not at all sure I agree with this. I think the market, left to its own devices, will always base its money on something valuable in its own right. Generally, as we know, that has turned out to be gold. While many forms of money substitutes (and secondary media of exchange) will in a free market in turn arise all these will be underpinned by convertibility and the monetary base of gold. A wholly fiat regime in my view requires the force of law in order to both gain and retain acceptance. Now there’s no doubt the general confusion about money is today so profound that fiat money, to most people in the west (and most economists), has become completely natural. To that extent, your assertion that such a regime is “entirely consistent with a free market in money” may have some merit, though I suspect in the long term it would be mostly theoretical. I say theoretical because I find it difficult to conceive of the central bank that could indefinitely withstand the permanent political pressure to expand the monetary base. Put another way, it seems to me that your assertion, to the extent that it has some validity, only has so through a sort of slight of hand. First the public had to be weaned by a series of governmental actions from their natural conception of money to the Clayton’s substitute. By the way, I’d be most surprised if Heinz didn’t favour an entirely free market in money and banking, as do I. What he objects to, I would imagine, is that in a fractional reserve system (fiat or otherwise) underpinned by various explicit and implicit government guarantees, money and credit will in due course expand in an “unnatural” fashion with all the insidious long term effects that follow. Moral hazard in other words. P.S. I thought your argument about the critical importance of the errors made by various central banks in setting their conversion rates to gold was particularly interesting. Satisfies Occam’s Razor nicely.