Friday, 4 March 2016

Monetary Rants

Rule #1 of blogging (unless you're an epic well-known blogger at which point you could pretty much do whatever you want): spread your posts over the week - don't publish it all the same day. And this morning I already wrote about why Economists make more money than physicists.

But I can't stop myself.
To be honest, this is the Life of an Econ Student - and this, my friends, is the life of an economics student. Ask anyone you know - this is the sort of rubbish we have to sit through and are expected to repeat on exam days. Somehow, today's lecturer managed to squeeze in an incredible amount of fallacies, misleading info and outright incorrect data in one excruciatingly-long lecture (I'm not even commenting on the lack of structure, monotonic style and scattered content).

Since I'm probably bound by University of Sydney Students Code of Conduct or similar agreement against personally attacking professors, I'll try not to go into revealing details about the horrors of today's lecture but rather provide a good old-fashion rant on monetary issues. Consider this a feedback or something.

It started out with an explanation for the purpose of our unit: "To Help the Government Make Good Decisions". (Let's ignore the fact that "Good" is subjective and irrelevant in this case) There might be 50 other reasons for somebody to pursue studies in our field; knowledge, curiosity, understanding how things work, being able to provide value for private sector etc. After all, the "purpose of engineering" is not to "help the government build good bridges" - why would economics exist only as a tool for the government? Strike 1.

Above was quickly followed by a very confused discussion of value, concluded and explained long ago by economists such as Menger as being subjective rather than objective - and the corollary of that: Interpersonal Comparisons of Utility are inadmissible. Our confused lecturer, evidently ignorant of this basic history and underpinnings of our discipline says:
Gold and Silver have intrinsic value because it is tangible! As opposed to our current money: pieces of paper with zero value, no promise of repayment or anything. Our money is fiat money - it has no value ... Did you guys hear about BitCoin? Similarly, BitCoin is fiat money - it has no value.
Ok. Let's take a deep breath and work through this.

Things (including money) have value because consumers believe that they can use it for something, in this case paying for goods and services. So why do people accept any particular form of payment, regardless of its form? Because they in turn have memories and experiences that tell them others accepted this form of payment in the recent past (see Regression Theorem). And because we understand subjective value theory we also know that nothing has "intrinsic value" - things are only valued because somebody sees personal use for it, in production or as a means of payment/store of value in the case of gold - certainly not because of whether it is tangible. 95%+ of our money are in bank accounts (intangible) but nevertheless have value since we use them for payments everyday, and we value them accordingly.

It is however true that our money is Fiat Money - i.e. money because the government says so. Which means that BitCoin, having no government saying anything about it whatsoever or central bank backing it, cannot be Fiat Money. That's probably strike 2-3-4-5 or something.

Next up is embarrassing lack of historical knowledge:
BitCoin is privately-issued money. Do we really want private issuers to determine the supply of money?
Ok, first of all BitCoin by its construction has a limited money supply. That is, nobody is determining the money supply in the Central Bank-sense of the word, but is created in the process of upholding the currency (see Mining). Secondly, private issuence of money has existed throughout history - perhaps most notably the Birmingham Button Makers, as famously told by Selgin (2011) that issued small-change copper coins when the British Royal Mint failed to supply the coins demanded, and had pushed silver coins out of the country by incompetently under-pricing the Silver-Gold exchange rate. A quick Wikipedia search finds even more instances.

On to the grand Finale:
Inflation-targeting to ensure price stability is really useful. There was a time when bags of money was needed to even buy food - and people didn't even have time to work because they had to spend their depreciating money so quickly. So price stability is desirable and that's what the Central Bank worries about.
Hyperinflation, commonly defined as 50% monthly rate of price increases (the equivalent of some 13 000%/year), has of coursed occurred through history, perhaps most famously in the interwar Weimar Republic or more recently Zimbabwe. The fact that we can name such examples shows how uncommon they have been through history. Besides, Central Banks have been quite instrumental in increasing inflation rates, especially during the infamous stagflations of the 1970s. In comparisons, periods with very little Central Bank influence over the economy such as the United States before 1913 are characterized by low inflation. As seen in the graph by Mueller (2010 & 2014), it is evident that rates of price inflation since Central Banks gained completely free reign in 1971-1973 has been the absolute highest in recorded history (note, the scale is logarithmic).
That is, if price stability is desirable (as my beloved professor asserts), it makes little sense for him/her to point towards central banks as the guarantor for price stability. A quick look at their track records shows that price inflation during the era of the Classical Gold Standard (1880-1914) averaged 0,1%, an annual rate which modern Central Banks surpass in like a month. The Fed-measured CPI averages around 4,5% since 1984. Moreover, Inflation-targeting wasn't a thing in Central Banks before 1990s (pioneered in New Zealand) and so makes this misleading statement even worse.

The notes I scribbled down in order to even remain sane:
3 options; 1) (s)he is ignorant and so not competent to teach this course, 2) (s)he is intentionally deceiving us, 3) (s)he believes we're so simple-minded that we can't be entrusted with the complexity of the real world (i.e. more than a rudimentary line of thought from "We Need Price Stability -> Give Us Central Banks!")
I really can't decide what's worse.

One thing is clear, however . If this is the quality of professors at our best, high-ranked universities, securing employment and professorship after finishing my PhD should be a piece of cake.

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