Money » The Cobden Centre

Many people know the Bank of England is creating new money through quantitative easing but if the quantity of money is being increased, how is that quantity being measured? What is counted as money?

Their recognition of the reality in our current deficit-based system that money is a bank created credit object leads them to a model that appears to fairly accurately relate monetary changes in their measure "MA" with actual economic activity.

But getting right the circulation of goods and services and the creation of new productive assets is one thing. The relationship between money and productive assets, on the other hand, particularly land, is quite another.

My post in response to this blog item follows

Interesting post: congratulations.

Clearly you have identified a monetary measure more in line with reality than the conventional mess.

I see you quote Rothbard:

Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

I think Rothbard's assumption is in error.

Money is not an object - a thing - it is a relationship.

As John Law put it in 1705 in "Money & Trade Consider'd..."

Money is not the Value for which Goods are exchanged, but the Value by which they are exchanged:

E C Riegel in his "Flight from Inflation" summarises the monetary relationship as follows:

The purpose of Money is to facilitate barter by splitting the transaction into two parts, the acceptor of Money reserving the power to requisition Value from any trader at any time.

The method of Money is to employ a concept of Value in terms of a Value Unit dissociated from any object. The monetary unit is any adopted value, which value is the basis relative to which other values may be expressed.

I prefer to define terms slightly differently.

A monetary system as I see it comprises goods and services circulating with "time to pay" (aka credit) by reference to a Value Standard (Unit of measure) and within a framework of trust.

By way of example there is the Swiss WIR - a trade credit clearing system, which has been operating since 1934 - and where billions of Swiss Francs' worth of goods and services change hands not FOR fiat Swiss Francs, but by reference to Swiss francs as a Value Standard.

The framework of trust - ie the enforcement mechanism or protocol in respect of debit balances - is provided by charges over WIR members' property. ie the WIR is a property-backed monetary system.

There are numerous proprietary barter systems all incorporating credit/time to pay - such as Bartercard - and all of them are monetary systems in microcosm.

What the Austrians think of as money, I would define as currency, being the unit of value FOR which people are accustomed to exchange goods and services.

John Law is relevant again here:

Every thing receives a Value from its use, and the Value is raised, according to its Quality, Quantity and Demand.

By that criterion gold is not really much of a currency, because you cannot live in it; heat your home or run your car on it; or type an email with it.

In my view, the three basic factors of production which have a generally acceptable use value are location (ie a Unit redeemable in land rental value); Energy ( eg a Unit redeemable in - say - 10 Kilowatt Hours) and Knowledge (ie the time value of intellectual property and the time value of an individual's innate knowledge, experience, gumption, contacts and everything else that dies with him).

It is our capacity to carry out unqualified labour (manpower) and our knowledge, individually and collectively, which back the credit we may issue as a sovereign individual.

But note that most of the bank created "money" in existence today is in fact based upon the use value of land, having come into existence as interest-bearing loans backed by mortgages. ie our money is largely deficit-based but asset-backed.

In my view, there is a fundamental qualitative distinction between "money" in circulation - which you have successfully isolated - and the vast bulk of money in existence which is what inflated asset prices (particularly land), and is essentially static.

All that QE does is replace this property-based private "static" credit with public credit. This money=credit can only cause inflation if it is lent or spent into circulation.

Since most UK wealth has become concentrated in few hands - which is what always happens when compounding interest combines with private property in land - then the solution to the crisis must necessarily involve systemic fiscal reform

This is in addition to a new approach to re-basing currencies upon Value generated by the issuer; rather than upon a claim over Value issued ex nihilo by a credit intermediary.

The key point is the recognition - to which you refer - that a unit of measure or "Value Standard", as I refer to it, is not necessarily the same as a unit of Currency, which is a generally acceptable ("fungible") object redeemable in value - whatever value.

In my analysis, a sustainable monetary system requires:

(a) an accounting system;

(b) credit or "time to pay";

(c) a Value Standard or unit of measure;

(d) one or more fungible currency Units;

(e) a framework of trust.

I see Money as a relationship, not an object: currency is an object.


"The future is already here -- it's just not very evenly distributed" William Gibson

"The White House wants the dollar to decline anyway because it would improve the United States' trade balance", he adds. Baker concludes:

The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.

Personally as an American who once was able to afford to travel to Europe, I'd like the dollar would ideally be on a 1-to-1 parity with the euro. But the trade balance between the U.S. and Europe is not the balance I suspect the White House is worrying about. From a personal perspective, since the dollar will probably continue to decline in value my personal emergency savings in dollars will continue to decrease in value. So, it would be best to switch out of dollars into other assets.

CNBC invited Jim Rickards, a senior managing director at a firm called Omnis to comment on the latest G-20 meeting and the future of the dollar. His testimony shows some rare lucidity about the present problems with our monetary system. Bearish on the dollar, bullish on gold, don't mistake him for a gold bug, for he is well aware of the consequences of a flight to the "barbarian's relic".

If gold goes to 1500$ [...] it has to with the fact that the dollar is imploding [...]

Rickards links an oped article at the Wall Street Journal penned by Federal Reserve governor Kevin Warsh to the G-20 meeting in an interesting way: it is a camouflaged warning against a fast drop of the dollar against other currencies, especially gold.

The Fed needs the dollar to get down by about half in the next 14 years, we have 60 trillion dollars of liabilities [...] there's no feasible combination of growth and taxes than can fund those liabilities. [...] They need to do that, but that's a dynamically instable process, they would like to do it gradually, and that's the plan, but if the market gets ahead of it, if the market sees this playing (which probably they will) you could have a very rapid collapse of the dollar [...]

The secular declining trend of the dollar has been resuming since early September, fueled by the carry trade proportionated by null interest rates in the US. This is leaving a lot of people uncomfortable, both those issuing the dollar as those pilling it up.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic.
...
...it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

His comment about the oil being a virtual drop in the actual dollar bucket by comparing it with a one time reduction of China's holdings is a little specious. If one is going to pshaw a daily removal of oil dollars taken out of the Forex equation, then one must consider the daily reduction of China's holdings; that is lot of 1/2 percent daily drops. Two months is a quarter trillion dollars.

Leaving the US will only continue to get more expensive...most arguably correct. The question is for how long. And for how long will living in the US be expensive - lowering of income, raising of prices even within the borders?

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

I took it to be what happened to the U.S. when China shifted away from using the U.S. dollar as a reserve currency and the subsequent (possibly positive) impact of the collapse of the dollar.

China has already switched away from 100% reliance on the dollar in its peg, but the presumption of most people is that the US$ still has a very large weight in the basket of currencies that China is presently pegging against.

In the mini-utopia, it was not just China that essentially dropped the US$ from its peg, but most of the other major neo-mercantalist nations as well. Presumably the various Caribbean dollars would still be pegged to the US$, but not the East Asian, Southeast Asian, and South Asian currencies that are presently pegged directly to the US$ or that we presume to be pegged primarily to the US$.

So its a loss of the counterweight from multiple neo-mercantalist nations that presently buffers declines in the US$.

On a sidenote, the Singapore basket peg should not be confused with the kind of basket peg adopted by the Koreans in the 80's in their transition from a US$ peg to a float ... they adopted a trade-weighted basket, so even if they did not announce the composition, it could be inferred to reasonable precision from public information. The Singapore peg does not publish the composition, which makes it far more difficult to infer whether a given move is just the natural consequence of the weights of different currencies in the basket, or is the result of a shift in the peg.

Note that since the (undated) rates given in the look back from Jan 1 2020 were mostly around 50% of current rates, in the story when it was called a currency collapse, there was a bit of hyperbole in that. In a full fledged currency collapse, it would not be surprising if the dollar lost 75% or 80%.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.