Money, Money, Monetary
I consider myself a fairly intelligent chap in spite of my lack of graduate and post-graduate degrees. I can hold my own in many discussions both on and off the political field, but when it comes to monetary policy theory, well, that is where I punch out of the debate. We might as well talk about quantum physics as far as I am concerned.
I understand the fact that if a nation floods their system with new currency, inflation should soon follow (see the Bernanke Anomaly) because more money (buying power) is chasing fewer goods, but the mechanics and minutiae behind it is something that I have never been able to wrap my head around.
Terms like M3, M4, quantitative easing, discount window, multiplier effect, and concepts like the role of the Federal Reserve, balance of trade vs. currency trading, currency manipulation, and how the gold standard keeps things in balance make sense on the surface, but digging in deep to understand how it all works together makes my head spin. And, I don't think I am alone in this affliction.
What prompted this confession was an opinion column in Tuesday's Wall Street Journal entitled, China Has Its Own Debt Bomb along with an article in same paper, Venezuela Plotting Currency Moves. Contributing to my feeling of monetary policy inadequacy is a book that I highly recommend, Charles Mann's 1493, which goes into great detail about how the silver trade of post-Columbian South America played havoc with the global money equilibrium and how China particularly was effected by gold and silver standards. In the book, he also talks about how debasing currency caused numerous failures of China's monetary system through the ages. Charles' book is a sobering must-read if you subscribe to the theory of "there is nothing new under the sun."
The WSJ piece goes into detail about how China has its own problems from flooding their market with money via lending (and, I assume, the multiplier effect.) It is interesting to note how China has, in about one generation, moved from being a third world agrarian society to an almost first world economic superpower. In order to have accomplished that, it has taken a HUGE amount of money. Theoretically, China may have had everything it needed to do this inside its borders. This would explain how it could just print money for use inside of its country while not affecting anyone outside of it. However, this was decidedly not the case. China needed many raw materials and energy (along with technology) to convert human assets (labor), which it had an abundance of, into finished goods.
Most of the sales that China makes are denominated in US Dollars. Because of this, China should have a glut of dollars. These dollars should be, by international law. put back into global circulation. This return of excess dollars should increase the value of the renminbi (China's currency) dramatically. But if that happened, China's cheap labor would no longer appear so cheap on global markets and the prices of their goods would rise, causing a $39.97 DVD player at Wal-Mart to cost, maybe, $97.50 after a few years of adjustment.
That wouldn't be a good idea would it? At least, not for China. Suddenly they would have millions of factory workers out of work and their expansion bubble would burst. POP! It would make our housing bubble burst of 2008 look like a wad of Dubble Bubble next to their Hindenberg. So, they bought US Government debt with all of those dollars. It gets rid of excess dollars in China, pumps up the American government which then spends the money to boost up our economy, which buys more Chinese goods.
However, in spite of the fact that the right likes to keep talking about it, China hasn't really bought any new US debt for about five years (except for replacing mature bonds with new ones). Bernanke is the one that has been buying most of the new American debt. (Do NOT ask me how that one works...)
Further complicating all of this monetary drama is multiple sovereign states inside the Eurozone spending each other's money, socialist states like Venezuela buying votes with money from nationalized oil companies and corrupt regimes in third world countries trading raw materials for money that barely reaches its citizens. Wrap it all up with the GlobalWarming Climate Change gang wanting to enact massive taxes on developed countries, while developing countries are spewing record amounts of hydrocarbons into the air, unabated and untaxed.
Is it any wonder that government functionaries cannot quite get a grip on how to 'fix' the global economic mess?
So, to summarize in plain English, what we now have is something like a bootlegger and a pusher selling each's products to the other with counterfeit money while using a hacked copy of Quickbooks to balance their checkbooks.
What could possibly go wrong with that?
I understand the fact that if a nation floods their system with new currency, inflation should soon follow (see the Bernanke Anomaly) because more money (buying power) is chasing fewer goods, but the mechanics and minutiae behind it is something that I have never been able to wrap my head around.
Terms like M3, M4, quantitative easing, discount window, multiplier effect, and concepts like the role of the Federal Reserve, balance of trade vs. currency trading, currency manipulation, and how the gold standard keeps things in balance make sense on the surface, but digging in deep to understand how it all works together makes my head spin. And, I don't think I am alone in this affliction.
What prompted this confession was an opinion column in Tuesday's Wall Street Journal entitled, China Has Its Own Debt Bomb along with an article in same paper, Venezuela Plotting Currency Moves. Contributing to my feeling of monetary policy inadequacy is a book that I highly recommend, Charles Mann's 1493, which goes into great detail about how the silver trade of post-Columbian South America played havoc with the global money equilibrium and how China particularly was effected by gold and silver standards. In the book, he also talks about how debasing currency caused numerous failures of China's monetary system through the ages. Charles' book is a sobering must-read if you subscribe to the theory of "there is nothing new under the sun."
The WSJ piece goes into detail about how China has its own problems from flooding their market with money via lending (and, I assume, the multiplier effect.) It is interesting to note how China has, in about one generation, moved from being a third world agrarian society to an almost first world economic superpower. In order to have accomplished that, it has taken a HUGE amount of money. Theoretically, China may have had everything it needed to do this inside its borders. This would explain how it could just print money for use inside of its country while not affecting anyone outside of it. However, this was decidedly not the case. China needed many raw materials and energy (along with technology) to convert human assets (labor), which it had an abundance of, into finished goods.
Here is where the economic and monetary theory gets confusing, but follow me as I explain it in terms even I can understand...One other thing that China needed was a market for all of the goods they were creating since their people didn't yet have enough money to purchase unneeded products. Because of the profitability of this raw-materials-in and finished-goods-out process, an enormous imbalance in trade with the US and many other countries was created.
Most of the sales that China makes are denominated in US Dollars. Because of this, China should have a glut of dollars. These dollars should be, by international law. put back into global circulation. This return of excess dollars should increase the value of the renminbi (China's currency) dramatically. But if that happened, China's cheap labor would no longer appear so cheap on global markets and the prices of their goods would rise, causing a $39.97 DVD player at Wal-Mart to cost, maybe, $97.50 after a few years of adjustment.
That wouldn't be a good idea would it? At least, not for China. Suddenly they would have millions of factory workers out of work and their expansion bubble would burst. POP! It would make our housing bubble burst of 2008 look like a wad of Dubble Bubble next to their Hindenberg. So, they bought US Government debt with all of those dollars. It gets rid of excess dollars in China, pumps up the American government which then spends the money to boost up our economy, which buys more Chinese goods.
However, in spite of the fact that the right likes to keep talking about it, China hasn't really bought any new US debt for about five years (except for replacing mature bonds with new ones). Bernanke is the one that has been buying most of the new American debt. (Do NOT ask me how that one works...)
Further complicating all of this monetary drama is multiple sovereign states inside the Eurozone spending each other's money, socialist states like Venezuela buying votes with money from nationalized oil companies and corrupt regimes in third world countries trading raw materials for money that barely reaches its citizens. Wrap it all up with the Global
Is it any wonder that government functionaries cannot quite get a grip on how to 'fix' the global economic mess?
So, to summarize in plain English, what we now have is something like a bootlegger and a pusher selling each's products to the other with counterfeit money while using a hacked copy of Quickbooks to balance their checkbooks.
What could possibly go wrong with that?
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