[A-List] Germany's 1923 Hyperinflation
Henry C.K. Liu
hliu at mindspring.com
Tue May 26 08:11:05 MDT 2009
Anne is a friend of whom I am rather fond, so I really don't want to get
into a confrontation with her.
Yet the homosexuality of Keynes is his own business and does not reflect
on his credibility as an economist. However, economists who went
hysterical on Y2K do raise questions on their analytical skills.
Ellen Brown's book presents a collection of well research facts and
reports on views held by a range of people on the issue of debt. It is
self explanatory that her book is widely read by audiences of diverse
ideologies, including conservatives. It is a hard to understand why
Gary North needs to "expose" her as a statist in conservative clothing.
Money is a statist instrument, even conservatives cannot deny that fact.
Any discussion of money unavoidably involves state actions. Readers can
decide on their own if Brown book is worth reading. They do not need a
high priest to pass judgment on the book to warn them of the danger of
unacceptable ideas. Paul was a Christian statist. North's attack on
Brown's book is based of labels that North slapped on it and carries no
intellectual insight.
In a critique of one of my articles in Asia Times (without identifying
me by name, only as the author) North wrote:
From time to time, I read about "exported deflation" into the
United States and "exported inflation" from the United States. A
recent example of this line of reasoning appeared in The Asia
Times. <http://www.atimes.com/atimes/China/FJ23Ad06.html> The
author wrote:
Dollar hegemony emerged after 1971 from the peculiar phenomenon
of a fiat dollar not backed by gold or any other species of
value, continuing to assume the status of the world's main
reserve currency because of the US's geopolitical supremacy.
This is nonsense. Dollar hegemony emerged after 1945 because the
United States was the world's strongest economy. The Bretton
Woods international monetary agreement of 1944 assured dollar
hegemony. When Nixon broke the terms of Bretton Woods by closing
the gold window, he did not undermine dollar hegemony. There was
no other central bank/nation willing to re-establish gold
convertibility. So, the dollar has won by default.
Such currency hegemony has become a key dysfunctionality in the
international finance architecture driving the unregulated
global financial markets in the past two decades.
This is true enough, but without the cooperation of other
national governments and central banks, this hegemony could not
be maintained. The hegemon is not in a position to force other
central banks from re-establishing the gold standard.
This may be overstated. Because most countries store their gold
in the vault of the Federal Reserve Bank of New York, there may
be some pressure: a threat by Washington to confiscate a
nation's gold. If this threat has been made, it has been made
very quietly. If the U.S. ever did this, foreign nations could
torpedo the dollar by selling T-bills
<http://www.comstockfunds.com/screenprint.cfm?newsletterid=1085>
in one retaliatory move. Tit for tat is a well-respected policy
internationally.
HOT MONEY
Our author continues:
China's overheated economy is the result of hot money inflow
caused by dollar hegemony.
This is nonsense. The Federal Reserve System has no authority in
China. The FED has been increasing the U.S. adjusted monetary
base at a mid-single-digit rate. The Bank of China has been
increasing its money supply at rates much higher. The hot-money
inflow of dollars into China has to do exclusively with China's
policy of making available cheap money at a fixed rate. The old
economic rule holds up: "At a low price, more is demanded." The
Chinese central bank is subsidizing the creation of demand for
its own currency by fixing the rate below the market. Then, in
order to meet world demand of yuan in dollars, it creates fiat
money. To blame the FED is ridiculous. Blame the Bank of China.
By the way, "dollars" do not "flow into" China. They move from
some accounts in large multinational banks into other accounts.
Jones buys yuan with dollars and transfers this money to Wong,
whose account rises. Jones bought yuan from Chen, who may buy
T-bills. Or, more likely these days, Jones bought yuan from the
Bank of China, which now buys T-bills.
While paper dollars do circulate in third-world nations whose
nationals have moved to the U.S. and mail home dollars, the
number of paper dollars in China is minimal, as far as anyone
knows. If they do circulate, they came from Chinese residents in
the U.S. who sent money home to their families. Federal Reserve
Notes do not circulate in China's capital markets.
China's developing economy should be able to absorb huge amounts
of capital inflow, but dollar hegemony limits foreign investment
to only the Chinese export sector, where dollar revenue can be
earned to repay capital denominated in dollars. Since China's
export sector cannot grow faster than the import demands of
other nations, excessive dollar capital inflow overheats the
export and exported-related sectors, while other sectors of the
Chinese economy suffer acute capital shortage.
This is also nonsense. Dollar hegemony has nothing to do with
which sector of the Chinese economy is favored by investors.
Investors with dollars in their bank accounts are buying yuan in
order to get in on China's economic boom, which is being
sustained by the Chinese central bank's policy of monetary
inflation. China's economy is a bubble economy. Investors are
willing to buy in to any sector where they can find Chinese
"cousins" to expedite deals.
Overheated economies produce growth-inhibiting inflation through
excessive import of money and sudden rises in prices for
imported commodities and energy.
He has it exactly backward. Central bank inflation of a nation's
currency is what creates an overheated domestic economy. Central
bank inflation can also create a boom in a foreign nation's
economy. How? By lowering foreign interest rates. How? By
purchasing that nation's treasury debt. This is taking place in
the United States today. It is the inflow of capital from the
Bank of China that is subsidizing the U.S. boom, not the other
way around. China is running a $100 billion trade surplus with
the United States. It is buying U.S. assets, mainly T-bills,
with this excess $100 billion.
It is not the excessive import of foreign capital that causes
economic overheating in China. It is the boom created by
monetary inflation, coupled with China's fixed exchange rate
policy, that sucks in foreign investment capital. Investors love
to invest in bubbles.
The imported inflation is then re-exported, causing inflation in
other parts of the global economy.
This man does not understand economic cause and effect. Imported
inflation is not re-exported. What is exported are cheap
products made in China. While it is wrong to speak of "exported
deflation," because deflation is accurately defined as "a
decrease in the money supply," it is legitimate to speak of
price competition. China is surely price competitive. Capital
flowing into China makes Chinese producers even more productive.
Prices fall, or else fail to rise as rapidly as they otherwise
would have, in nations that import Chinese-made products.
Inflation causes interest rates to rise, which in turn causes
unemployment and recession in all economies that are plagued by it.
But China is price competitive. It is pressuring consumer goods
prices in foreign nations to fall. This causes interest rates to
fall: a lower rate for the price inflation premium that is built
into in long-term loans by lenders who demand compensation for
the threat of depreciating money.
Add to this factor the demand for U.S. T-bills by the Chinese
central bank. It causes American short-term rates to fall.
Rising demand for T-bills from China lowers the rate of interest
because the Treasury can sell T-bills at a lower price. It is
China's central bank, not the FED, that is the main source on
the supply side for today's low interest rates in the United States.
Dollar hegemony enables the US to be the only exception from
macroeconomic penalties of unsynchronized exchange rates and
interest rates. The US, because of dollar hegemony, is the only
country that can claim that a strong currency that leads to
trade deficits is in its national interest in a global economy
dominated by international trade. This is because a strong
dollar backed by high interest rates helps produce a US capital
account surplus to finance its trade deficit.
High interest rates? In the United States? Have you checked your
rate of return from your passbook savings account or money
market fund? What has this guy been smoking?
Having misunderstood economics, and having perceived low
interest rates in the U.S. as high interest rates - i.e.,
imposing bad economic theory on existing economic facts - the
author then does something remarkable. He draws a correct
conclusion.
The issue is not whether Asian central banks will continue to
have confidence in the dollar, but why Asian central banks
should see their mandate as supporting the continuous expansion
of the dollar economy at the expense of their own non-dollar
economies. Why should Asian economies send real wealth in the
form of goods to the US for foreign paper instead of selling
their goods in their own economy? Without dollar hegemony, Asian
economies can finance their own economic development with
sovereign credit in their own currencies and not be addicted to
export for fiat dollars. As for Americans, is it a good deal to
exchange your job for lower prices at Wal-Mart?
There is one answer to all of these questions: mercantilism.
http://www.lewrockwell.com/north/north314.html
Mercantism? How can one practise mercantilism by accepting fiat money?
Hot money went into China to profit from China's higher interest rates.
Every economist, except North knows this fact.
North concludes his 2004 article with a prediction:
I expect an end to fixed rates in China within a year after the
United States pulls out of Iraq. If U.S. troops are still there
in 2008, then I would expect floating rates before 2009. But I
don't think we will have to wait that long.
Well, it is now 2009, and floating rate is nowhere in sight in China who
still has a BBC (Basket, Band and Crawl) system on exchange rates.
Henry C.K. Liu
Anne Williamson wrote:
> .hmmessage P { margin:0px; padding:0px } body.hmmessage { font-size:
> 10pt; font-family:Verdana } The piece is actually about Ellen Brown
> and statists-claiming-to-be-libertarians, not Dr. North's personal
> eccentricities, for which he is widely-known. (Bill Totten has been
> posting a wide range of material on the economic crisis, and not
> being a libertarian, I thought Bill might find further background
> information on this school of thinking and how Ms. Brown is an
> unlikely objection of their toleration to be of ironical interest.
> Since North's piece comes with a vigorous gold argument and many
> links for further study, it seemed a good one to post.)
>
> However, if you want a round-up of Dr. North's advisories since Y2K,
> it might be helpful to a reader to know that Dr. North called the top
> of the dot com bust and advised his subscribers to be well-clear of
> the fiasco. He again called the top in November 07, and told his
> subscribers to go short. They have made a lot of money subsequently,
> while the dot com folks saved their then newfound gains all those
> years ago. As far as survivalism, it's quite widespread today as the
> population becomes more and more aware of just how useless the
> self-serving Feds actually are in a true crisis - so all those Y2K
> "crazies" may be just a step ahead, after all. But, I suppose, we'll
> soon have a WAR AGAINST ECCENTRICITY, INCORRECT THINKING, AND
> CHRISTIAN CRAZIES (WAEITCC), in which case Dr. Gary North will
> certainly have to be executed.
>
> Oh, by the way, NEWS FLASH: BRITISH ECONOMIST AND COLONIALIST JOHN
> MAYNARD KEYNES WAS A NOTORIOUS HOMOSEXUAL AND BUGGERED MANY, MANY
> MAXIMALLY POOR UNDERAGE INDIAN BOYS FOR MERE PENNIES IN THE COURSE OF
> MANY TRIPS TO INDIA OVER DECADES!
>
> So, in the spirit of the attack on Dr. North due to his incorrect
> predictions of Y2K consequences, I assume we can we now discount The
> General Theory, right? Oops, probably not, since homosexuality is
> now the greatest of virtues, politically speaking, and all those
> little Indian street boys bent over and had their pants pulled down
> for a good cause, though, alas, for little personal profit. But,
> they serviced a great man, eh? ------------------------- Date: Mon,
> 25 May 2009 15:22:06 -0400 From: hliu at mindspring.com To:
> a-list at lists.econ.utah.edu Subject: Re: [A-List] Germany's 1923
> Hyperinflation
>
> North gained some notoriety for his prediction of a possible Y2K
> <http://en.wikipedia.org/wiki/Y2K> catastrophe in print and online,
> before 2000. Like economists Don McAlvany
> <http://en.wikipedia.org/wiki/Don_McAlvany>[5]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-4>,
> Ed Yourdon[6]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-5>
> and Ed Yardeni[7]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-6>,
> and many others, North suggested that a Y2K date-rollover failure of
> the global Information Technology
> <http://en.wikipedia.org/wiki/Information_Technology> (IT)
> infrastructure might precipitate severe disruption and perhaps even
> an economic collapse
> <http://en.wikipedia.org/wiki/Economic_collapse>. North urged his
> readers to take "prudent" survivalist
> <http://en.wikipedia.org/wiki/Survivalist> preparedness measures.[8]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-7>
> A concerted last-minute effort by IT professionals prevented this
> catastrophe, but North later described Y2K as "a close call." His web
> site Gary North's Y2K Links and Forums has been preserved at a mirror
> site.[9]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-8>
> North's Y2K forums[10]
>
<http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist%29#cite_note-9>
> were all moderated by volunteer subject matter experts. For example,
> the Securing Your Home Forum was moderated by survival retreat
> <http://en.wikipedia.org/wiki/Retreat_%28survivalism%29> expert Joel
> Skousen <http://en.wikipedia.org/wiki/Joel_Skousen>, and the
> Inventory and Barter Items Forum was moderated by the survivalist
> novelist James Wesley Rawles
> <http://en.wikipedia.org/wiki/James_Wesley_Rawles>, who later went on
> to be a survivalist blogger and preparedness guru. North's main Y2K
> web site was taken offline early in 2000.
> http://en.wikipedia.org/wiki/Gary_North_(Christian_Reconstructionist
> <http://en.wikipedia.org/wiki/Gary_North_%28Christian_Reconstructionist>)
>
>
>
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