Reframing the Gold Standard Debate: The Fixed-Money-Supply Standard

A debate between those advocating for a fiat money supply and those advocating for a gold standard has been raging for nearly a century. It’s time to reframe this debate in order to highlight some of the intrinsic properties of gold that are germane to this polemic and to inform the discussion of using gold as the philosophical basis for intelligent and prudent monetary policy.

This much is clear: Each side in this debate seems to enjoy insulting the intelligence and wisdom of the other. Consider, for example, the point of view of H. Parker Willis, the first secretary of the Federal Reserve Board:

“Central banks will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of vague ‘stabilization’ that will, in the long run, be for the greater good.”

On the other side, a frequent dismissal of advocates for a gold standard is that there is no difference between wampum, large rocks, and gold. Yet this statement is a false equivalency. By making a comparison of gold to something that most do not take seriously — wampum or large rocks — critics intend to evoke images of presumably primitive cultures and their presumed naïve beliefs about economics, thus simultaneously dismissing the views of gold standard advocates.
At best, evocation of this kind creates a contextual pit that is difficult for “gold bugs” to climb out of as they try to defend a position made to look foolish from the outset. But far worse is that gold bugs often respond with passionate hue and cry for their precious metal without ever speaking of the intrinsic philosophical value of their point of view.
Despite what is frequently argued, the genius of the gold standard is not that it is based on something of “real” value; as “real” is simply a layman’s way of saying that there is a demand curve for the good. Wampum also had a demand curve at one point. No, the genius of the gold standard is that it implies an important rule:

No money shall exist in excess of the money stock.

Put another way, it implies a fixed denominator in the measure of economic growth and of money supply. The importance of this concept is already accepted. This is why we “inflation adjust” economic growth in recognition that the denominator is plastic. Left unadjusted, our measurement of the true state of the economy is distorted. Just as it is when monetary officials are allowed to create money supply virtually and then the money is made more momentous by the multiplier effect.
So a “fixed money supply” law could substitute for a “gold standard.” Of course it seems to be human nature to incline toward excess. That is, do people truly have the fortitude and discipline to stick to a fixed-money-supply/print-no-money law? Or would another round of over leveraged banks or overleveraged investors in another, unfortunately, all too foreseeable future, beg a monetary authority for inflationary tonic to cure them of debt excesses?
It is all too easy to wave the fiat money hand or pull the fiat money lever until months later measures of inflation register a positive second moment. By comparison, the stock of gold is nearly fixed, limited in expansion by its scarcity and difficulty of extraction. Essentially, gold’s scarcity and difficulty of extraction serves as an artificial law or barrier to the dilution of the intent of a fixed-money-supply law: print no money.
If both sides could look past gold and instead debate what qualities a future monetary framework should entail, they might discover that among the important criteria to be met by a fixed-money-supply standard are:

• A good that has a nearly universal demand curve
• A good that has a practically fixed supply

Though I discussed the second criterion above, the first criterion is also important. Why? Because without a nearly universal demand for the good, people will be inclined to switch to another good when convenient. So a nation that wanted to inflate its way out of debt problems would make another good the basis for their fixed money supply regimen. Think: The Chinese declaring the Great Wall as their currency or the United States declaring the Statue of Liberty as the basis of its money supply going forward. Both are large and in fixed supply, however those in Madagascar could give a damn. For a good to be considered viable, its demand curve must be nearly universal.
Because gold meets both of the above criteria, it just so happens to make for a natural candidate to be the central focus of a fixed-money-supply regimen. Alternatives, including wampum in its time and place, have met the two criteria above. Currently, carbon credits meet these criteria, too and, in fact, they have served as a viable way of managing another profligate good: pollution.
Gold bugs are usually forced to defend the intrinsic value of gold as a substance, which just looks silly to those who do not hold their point of view. That makes bugs vulnerable to being dismissed by critics. I argue then that the gold standard debate needs to be lifted from the “gold standard” to its actual implicit core: the fixed-money-supply standard.

Pakistan Rupees Short Review against other major currencies of the world

Pakistan Rupees rate was in a continues declining trend against US Dollar and other major currencies of the world since the year 2012 started.
Most of the analysts were pointing out the raise of exchange rate due to oil transactions, when ever pak rupee forex rate loose its strength against US Dollar rate, The other currencies also get impact lets have a view of the currency rates in Pakistan from the beginning of Jan, 2012.
As per Inter Bank currency rates on Jan 3, Pak Rupee rate was on Rs. 89.8 selling and buying at Rs. 89.6 against Dollar rate, Rs.116.52 selling and Rs.116.26 against Euro exchanges rate, Rs.24.45 selling and buying at Rs. 24.39 against UAE currency rate, Rs. 139.45 selling and Rs.139.14 buying against Pond exchanges rate.
As per Jan 6 stats of the currency rates in Pakistan Pak Rupee was on Rs. 90.3 selling and buying at Rs. 90.1 against USD, Rs. 115.55 selling and Rs. 115.29 against Euro, Rs. 24.58 selling and buying at Rs. 24.53 against UAE Dirham, Rs. 140.01 selling and Rs.139.7 buying.
Currency Market was closed on 7 and 8 Jan and the data was choppy during Jan 9 till today, the figures are in a passive passion and a little recovery seen at Jan 11, Pak Rupee standing at Rs. 89.9 selling and buying at Rs. 89.7 against USD, Rs.114.56 selling and Rs.114.31 against Euro, Rs.24.48 selling and buying at Rs. 24.42 against UAE Dirham, Rs. 138.95 selling and Rs.138.64 buying against British Pond.

Deficits pose big challenge, warns SBP

The State Bank of Pakistan. — File Photo

KARACHI: The State Bank kept the policy interest rate unchanged at 12 per cent on Saturday, saying the real challenge lay in financing the fiscal and external current account deficits.
The Governor of SBP, Yaseen Anwar, explained the difficulties being faced by economy as well as problems in monetary management during a media briefing where he announced the monetary policy for the February-March period.
The SBP expects the average inflation in 2011-12 (FY12) to range between 11 and 12 per cent, implying an uptick during the second half of the current fiscal.
The central bank chief said inflationary pressures had not eased significantly. There were indications of underlying inflationary pressures. For instance, the number of CPI items showing year-on-year inflation of more than 10 per cent was significant and mostly belonged to the non-food category, he added.
The SBP said it had been providing substantial liquidity on an almost permanent basis, but it carried risks for effectively anchoring inflation expectations in the medium term.
From July 1 to Feb 9, Rs230 billion had been supplied by State Bank.
The government has so far borrowed Rs444 billion from the banking system, including Rs197 billion from State Bank, an amount considerably higher than the yearly financing requirements of Rs293 billion envisaged in the FY12 budget, said Yaseen Anwar.
The provisional estimate of fiscal deficit for the first half of FY12 (July-Dec 2011), from the financing side, shows a deficit of Rs532 billion, or 2.5 per cent of GDP.
Over the past 10 years, the deficit has always been higher in the second half of a fiscal year by at least 0.5 per cent of GDP.
“Containing the FY12 fiscal deficit close to the government’s revised target of 4.7 per cent of GDP would be difficult,” the State Bank governor said.
BIG CHALLENGE: The SBP said the real challenge was to finance the projected external current account deficit.
“Incorporating a steady flow of workers’ remittances, the external current account deficit is expected to remain in the range of $3.5 billion to $5.5 billion, or 1.5 to 2.4 per cent of GDP,” said Yaseen Anwar.
The risks to external payments position have also increased due to worsening terms of trade, fragile global economic conditions, and continued paucity of financial inflows. In addition, $1.1 billion is to be repaid to the IMF during the second half of 2011-12.
The SBP’s foreign exchange reserves have already declined to $12.2 billion from $14.8 billion since July 1. Similarly, the rupee-dollar exchange rate has depreciated by 5.2 per cent in FY12 so far, he added.The possibility of limiting the deficit to the lower side of the range is mainly contingent upon the realisation of Coalition Support Fund, $800 million, and the proceeds from the auction of 3G licences, estimated to be around $850 million, he added.
The actual net capital and financial inflows during the first half of FY12 was only $167 million due to decline in both the direct and portfolio investments and shortfalls in official flows.
“Assuming that all the official flows contemplated by the government are realised – $500 million from the issuance of euro bonds, $800 million from the privatisation proceeds of PTCL, and budgeted loans from international financial institutions – the net capital and financial inflows could increase to $3.8 billion by June 2012,” said Mr. Anwar.
The SBP said the credit growth to private sector would remain weak. “All of the fresh credit disbursement in first half FY12 was utilised to meet the working capital requirements, which implies that a significant part of this credit will be retired in second half of the year,” said the Governor.
The full year expansion in credit to the private sector is expected to remain weak for yet another year in FY12 despite interest rate reductions.
“Though, tax collections in first half of the current fiscal grew by 27.1 per cent the full year target of Rs1952 billion still seems ambitious,” he said.

Paper Promises: Money, Debt and the new World Order

by USAMA ABBASI

The world is drowning in debt. Greece is on the verge of default. In Britain, the coalition government is pushing through an austerity programme in the face of economic weakness. The US government almost shut down in August because of a dispute over the size of government debt.
Our latest crisis may seem to have started in 2007, with the collapse of the American housing market. But as Philip Coggan shows in this new book, Paper Promises: Money, Debt and the new World Order which he will talk about in this lecture, the crisis is part of an age-old battle between creditors and borrowers. And that battle has been fought over the nature of money. Creditors always want sound money to ensure that they are paid back in full; borrowers want easy money to reduce the burden of repaying their debts. Money was once linked to gold, a commodity in limited supply; now central banks can create it with the click of a computer mouse.
Time and again, this cycle has resulted in financial and economic crises. In the 1930s, countries abandoned the gold standard in the face of the Great Depression. In the 1970s, they abandoned the system of fixed exchange rates and ushered in a period of paper money. The results have been a long series of asset bubbles, from dotcom stocks to housing, and the elevation of the financial sector to economic dominance.
The current crisis not only pits creditors against debtors, but taxpayers against public sector workers, young against old and the western world against Asia. As in the 1930s and 1970s, a new monetary system will emerge; the rules for which will likely be set by the world's rising economic power, China.
Philip Coggan was a Financial Times journalist for over twenty years, including spells as a Lex columnist, personal finance editor and investment editor, and is now the Buttonwood columnist of The Economist. In 2009, he was awarded the title of Senior Financial Journalist in the Harold Wincott awards and was voted Best Communicator at the Business Journalist of the Year Awards

The Nobel prize in economics

How to know what causes what

THE Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Thomas J. Sargent of New York University and Christopher A. Sims of Princeton University. Predictably, this blog proved useless at predicting the winner. The Academy of Sciences provides useful backgrounders on the prize, technical and non-technical. These interviews are also good on Mr Sargent as is this one on Mr Sims.

Both laureates spent the main portion of their careers together at the University of Minnesota—one of the bastions of the "freshwater" school of macroeconomics—in the 1970s and 1980s (though they only once co-authored a paper together). The prize is awarded "for their empirical research on cause and effect in the macroeconomy". It's difficult to imagine what might be more important.

Robert Lucas, a previous Nobel laureate, showed how incorporating expectations into macroeconomic models muddled the framework economists prior to the "rational expectations revolution" thought they saw so clearly. As (in an excellent summary) Alex Tabarrok puts it, their work separately grappled with different ways of addressing the Lucas Critique of 1976:

Lucas looked at the large econometric models of the 1970s, models that contained hundreds of variables relating economic aggregates like income, consumption, unemployment and so forth. Lucas then asked whether these models could be used to predict the impact of new policies. One could certainly take the regression coefficients from these models and forecast but Lucas argued that such a method was invalid because the regression coefficients themselves would change with new policies.

If you wanted to understand the effects of a new policy you had to go deeper, you had to model the decision rules of individuals based on deep, invariant or 'structural' factors, factors such as how people value labor and leisure, that would not change as policy changed and you had to include in your macro model another deep factor, expectations.

The 2011 laureates' work focuses on the implications of rational expectations for empirical and econometric work and on ways to uncover these structural parameters. Mr Sargent's enormous contributions to rational expectations econometrics were purely methodological and his methods are explicated in his three graduate textbooks: Macroeconomic Theory, Dynamic Macroeconomic Theory and Recursive Macroeconomic Theory, bibles of modern macroeconomics.

However, Mr Sargent's association with the rational expectations revolution and its extension to the efficient markets hypothesis, much demonised during the crisis, should not be misunderstood. Much of his work has focused on agents learning within models and less-than-fully-rational expectations. Much of the criticism of rational expectations is integrated into this work. Learning involves two elements: firstly that agents (consumers or businesses) have incomplete knowledge of some parameters in the model, and secondly a specification of how agents learn about these parameters, based on the observations of evolving time series.

Chris Sims' work upset the existing paradigm by arguing that the existing models for looking at causal relationships in macroeconomics relied on "incredible" identification assumptions. This meant that interpretations of "what causes what" were necessarily flawed. There is a nice explanation of the problem that Mr Sims' work addresses in the technical backgrounder from the Nobel Committee.

To appreciate the problem of identification, suppose we consider the coffee market and try to explain movements in the quantity and price of coffee. A traditional approach is to isolate a variable that is believed to solely influence either supply or demand. One such variable is weather. Bad weather may reduce the amount of coffee produced at all prices, i.e., it shifts the supply curve inward. If the demand curve for coffee is not affected, a change in the weather will lower the equilibrium quantity of coffee and raise its price. Variations in weather therefore allow us to trace out - to identify - the shape of the demand curve. However, is the assumption that weather does not influence the demand curve plausible? Even if people's taste for coffee does not depend directly on the weather, as Sims pointed out coffee buyers know that weather is variable and may stock up when adverse weather variations arise. Thus, expectations about weather (and other varying determinants of supply and/or demand) are likely to affect both supply and demand, in such a way that weather changes may not have the expected consequences.

He proposed a statistical tool, the vector autoregression (VAR), as a solution to this problem. As with Mr Sargent's work, VARs are now central to macroeconomics. This Nobel prize honours the ubiquity of their innovations.

Economic Hub of Pakistan karachi

Peaceful environment is necessary for economic growth and national opulence. Citizens need an pledge of quality of life and this is possible through income generation, physical ,social and infrastructure, security and safety, and political stability in their region. At the same time, domestic and foreign investors, industrial and business community, & banking and stock exchange clients & customers want concrete surety that their investment would be safe and beneficial.

Karachi is the largest city of Pakistan with an estimated population of around 20 million and has the largest informal sector as well as the largest number of home-based workers. It accounts for a lion’s share in Pakistan’s revenue generation by contributing about 68% (KCCI annual report 2010-11) or 65% (as per City District Government Karachi report) to the national exchequer. All national and international surveys, reports, and analyses confirm that Karachi is the mainstay of the Pakistani economy.

Karachi contributes about 55% to Pakistan's GDP, that is, about US$ 98 billion, projected to reach $130 billion by 2015 provided peace is restored in the city and suburbs. Of course, Karachi’s high share in GDP is due to its large industrial base. Karachi has 15,000 formal industrial units in its 5 industrial zones while there are 360 markets spread all over the city. It is estimated by this writer that the daily loss to the national GDP is Rs 2 billion for every hour that Karachi remains non-operational.

During the previous government’s tenure, the policies of Premier Shaukat Aziz encouraged substantial bullish activity at the Stock Exchanges. This led to a huge cash surplus that needed to be channelized to productive usage. At the same time Dubai witnessed a construction boom. Thus a formidable flight of capital was witnessed as billions of dollars were transferred thru Hundi and Hawala or thru couriers from Pakistan to UAE. This was done neither due to law and order nor due to political instability. The prime reason was the fabulous opportunities for short-term profits and the enchanting lure of Dubai.

Today, the flight of capital is in tandem with the pull-out of investment and the root cause has been the criminalization of Karachi, the breakdown of the security apparatus, and the juvenile efforts and actions of the political parties. Moreover, the near-collapse of the energy sector has proved to be extremely detrimental. Resultantly, foreign investment has dipped by 35% while domestic investment is on hold at this moment. The Stock Exchanges are at a downward trend and this has affected investment in real estate and other hitherto profitable ventures. Non-performing loans portfolio of banks is alarmingly high and State Bank of Pakistan has not been able to curb the menace of inflation.

It is entirely possible, although there are no credible facts and figures, that billions of dollars have been transferred to Malaysia, UAE, Bangladesh, and even Sri Lanka. Although most of the entrepreneurs do not acknowledge their foreign investment, the market gossip confirms that between 9 and 12 home textile manufacturers have set up industries in Bangladesh. The readymade garments manufacturers are taking a delegation to Bangladesh after Eid to scout joint ventures and investment possibilities. It is to be noted that since January 2011, European Union has allowed semi-finished and finished fabrics from SAARC countries if used by other SAARC countries, including Bangladesh, under the regime of SAARC Regional Cumulation in which the value-added products made from these intra-SAARC exports by Bangladesh would also be eligible for GSP+.

The industrialists of Karachi have to suffer law and order situation, power shortages, low water supply, and gas difficulties, as well as Pakistan not enjoying GSP+ for exports to EU. Furthermore, the trade and industry community is subject to extortion and arm-twisting by political and other organizations. This bhattha collection syndrome has taken huge proportions in the last couple of years. Unfortunately, the political parties, the government, and the law-enforcing agencies have not been able to stem this menacing tide. All these factors have compelled investors to set up or contemplate the setting up of units in other countries. There is news of funds being transferred to Quality Industrial Zone in Jordan. In Malaysia too, Pakistanis are investing heavily with emphasis on construction and trading. This was also revealed a couple of months ago by the outgoing Malaysian Consul General in Karachi.

Education has been seriously affected due to continued violence and strikes. Educational institutions are closed without any notice and examinations are postponed at the last minute. The education standard has deteriorated and has put the schooling careers of thousands at stake. KCCI estimated that about 35000 students from violence-affected areas are not attending classes while around 700 teachers are unable to take classes in Kati Pahari and Orangi, etc.

Weddings, funerals, and social gatherings have been negatively impacted and this has also affected the viability of service providers as well as employment. Daylight robbery is the norm and burglaries are an every day thing. Citizens have started to erect barriers that limit access to their neighborhoods and there is a substantial increase in demand for armed guards.

Karachi has over 15,000 industries in the organized sector while there are more than 50,000 units in the informal or unorganized sector that are generally not under the purview of either Labor Department or EOBI/SESSI etc. The workforce figures do not reflect real employment because employers tend to understate the number of their workers to these departments and agencies. However, conventional wisdom reckons that if each factory on an average employs 200 workers, then the 15,000 industries should be having in excess of 3 million direct employees. If the workers of the informal or unorganized sector are included, plus taking into account home-based workers, then one could state that Karachi provides direct employment to over 5 million workers. This does not take into account domestic workers or volunteers working infrequently.

Recently, it has been seen that strikes are becoming common again. KCCI has noted that 36 announced strikes have taken place in the recent past. So much so, that even the Karachi Port has been shut off due to strike to protest the murder of a third-tier leader of an ethnic-based political party. PIA employees went on a strike against a politically appointed Managing Director, while the KESC management-workers imbroglio made Karachi hostage to loadshedding and riots for many weeks. Few days ago, the Custom people went on strike to protest the arrest of a colleague who was nabbed for committing a fraud of over Rs 1.50 billion. Pakistan’s trade was badly affected due to non-operational status at the Custom House.

The law and order situation alongwith prolonged loadshedding has affected worker‘s productivity severely. It is estimated that productivity has fallen by over 25% even when Pakistani worker’s productivity is acknowledged as less than a comparable Bangladeshi or a Sri Lankan worker. The official GDP figure of less than 2.40% is testimony to the difficult economic conditions of Pakistan; the main reason being the state of affairs in Karachi.

The situation in Karachi is primarily due to the machinations of political parties and due to their non-chalant attitude towards Karachi. This metropolis was called The City of Lights. This appellation was cherished with devout pride by the denizens of Karachi. What happened that today it is the City of Blood, the City of Darkness, and the City of Chaos?

So, can there be a U-turn by the political parties to seriously and earnestly endeavor to bring peace? Will they listen to the “signals” emanating out of the meeting of the Formation Commanders in GHQ? Will they seriously take cognizance of the daily killings and the mayhem in Karachi?

The political parties are basically fighting to maintain their turf. These parties have protectors of strong and dominant players in gun-running, land-grabbing, and drugs-marketing. The income from these activities is phenomenal and also provides power and importance. Most of the warehouses in Khadda/Moosa Lane/Kharadar/Boulton Market/Marriott Road are owned by unscrupulous importers to take advantage of the notorious Afghan Pakistan Transit Trade Agreement as well and other import “manipulations” by bringing foreign consumable goods. They pay about Rupees 100,000 per container for night-time unloading to store goods in the warehouses while “protection” of these warehouses is another big money-making racket that was partly exposed during the Ashura bomb blast and arson at the Boulton Market two years ago.

At the same time, where on the one hand, an ethno-political party has a mesmerizing control over Karachi, then on the other hand, the other parties are striving to get a foothold in the City’s political arena and to wrest seats from the control of this ethno-political party. This has naturally brought about a harsh reaction resulting in a brutal law and order situation culminating in daily deaths in double figures.

Do the politicians really want to bring about a peaceful and livable environment in this city? The task is onerous and the journey difficult. But, if there is a will there is a way. The first and foremost step to be taken is that all party flags, posters, graffiti, and slogans must be eliminated and wiped out from the city. Secondly, there would be no display of arms at political meetings nor would the politicos move around with armed escorts. Thirdly, what is of prime importance is that the political parties must keep at bay their hardcore militants and must ensure that political patronage is not accorded to militants arrested by the law-enforcing agencies.

There have been so-called De-weaponization campaigns and at the same time clarion calls for ridding this City of arms. It is easier said than done. Thousands of arms licenses are being issued on political grounds by the Home Department. The Interior Minister reveals that sophisticated Israeli arms have found their way into Karachi. The solution is however possible. Enact a Federal law making illegal arms a crime punishable by life imprisonment. Then make sure that once a culprit is arrested, that person must be sentenced if found guilty and if there is political pressure on the law enforcers, the name of the politician pulling rank must be forwarded to the Prime Minister for taking action against that politician. Meantime, an amnesty may be declared for those possessing illegal arms. This is a tall order but efforts must be continuously made in this matter.

Lack of employment opportunities is one major reason for the despondency and for the escalation in the crime rates. A massive, fast-track program must be initiated by the government to introduce projects such as low-cost housing in this country. This would directly spur up activity in 45 industries and provide jobs for millions. This is the only viable initiative for reducing unemployment and attacking extremism, terrorism, and crimes.

Therefore, it is high time all leaders of political parties must seriously, for once, have a two-day All Parties Conference to deliberate and agree on a three-point agenda:
1. Economy
2. Law and Order
3. Code of Conduct

This would be the deed of Peace. This would be sured and supervised by the Armed Forces, by the Judiciary, and by the Business Community.

Ben S. Bernanke will probably try to spur economic growth this month

Federal Reserve Chairman Ben S. Bernanke will most likely try to impel economic growth this month by wounding near-record-low borrowing costs, His new incentive may not aid the 15 million Americans without work.

Hiring held up in August in the most horrible month for U.S. employment in almost a year. The unemployment rate remained wedged at 9.1 percent.

The Fed may decide at its Sept. 20 to 21 meeting to replace short-term Treasury securities in its $1.65 trillion assortment with long-term bonds in a bid to lower rates on everything from mortgages to car loans, said economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc. The Fed’s influence on the economy will probably be muted as drooping consumer confidence, depressed home values and 6 million workers unemployed for six months or more weigh on demand.

“The main problem is that rates have been low for three years now and that isn’t spurring people to buy,” said John Silivia, chief economist at Wells Fargo in Charlotte, N.C. “Companies won’t hire unless demand is there. The Fed can lower the cost of credit, but it can’t force companies to create jobs.”

Silvia predicts the economy will produce at a 1 percent annual rate in the second half of this year, little changed from the 0.7 percent tempo logged in the first six months, the weakest stretch since the recovery began in June 2009.