Why doesn't the world have one currency?

[bjornart]

Okay, I get that I didn't know that deflation means a decrease in prices due to a decrease in the volume of money.

But the value of this money will apparently increase in relation to widgets as production is done more efficiently and as the population increases.

If the population doubles without other factors changing the $600,000 will have to roughly equal 200,000 widgets.

So anyone who manages to save some money will hang on to it, since it'll buy more widgets later, which temporarily removes money from circulation and drives a further apparent increase in the ratio between money value and widget value.

It might not be deflation but it looks a lot like it. Unless there is something I've ignored?

 

[shanek]

Okay, I get that I didn't know that deflation means a decrease in prices due to a decrease in the volume of money.

But the value of this money will apparently increase in relation to widgets as production is done more efficiently and as the population increases.

Yes, but that isn't deflation. That's freeing up capital for other purposes.

If the population doubles without other factors changing the $600,000 will have to roughly equal 200,000 widgets.

So anyone who manages to save some money will hang on to it, since it'll buy more widgets later, which temporarily removes money from circulation and drives a further apparent increase in the ratio between money value and widget value.

It might not be deflation but it looks a lot like it. Unless there is something I've ignored?

Yes: that people are most likely going to hold on to their money by putting it in a bank, which invests the money in the economy.

 

[bjornart]

Yes, but that isn't deflation. That's freeing up capital for other purposes.

No, only in the case of increased efficiency. In the case of population increase there is no freeing up of capital.

In your widget example, if the population doubles without any increase in production efficiency, the desire for widgets also doubles, and people all keep working producing widgets, they will have 200,000 widgets, $600,000, an _no_ _additional_ _free_ _capital_. Please pay attention to what I'm asking about.

It may not be deflation, but neither is it freeing up capital.

Yes: that people are most likely going to hold on to their money by putting it in a bank, which invests the money in the economy.

Only if people are willing to take up loans, and when the money is decreasing in value, due to deflation or some other process with the same effect, they'll be hesitant to do so since they'll be forced to pay back what amounts to a larger and larger value.

 

[shanek]

No, only in the case of increased efficiency. In the case of population increase there is no freeing up of capital.

There is an increase in labor resources. Same effect.

It may not be deflation, but neither is it freeing up capital.

You're correct; increases in labor resources is different. And the third function, natural resources, can also play a role if, for example, new, easy-to-get-to sources of widget-making material is found. But it's all the same effect.

Only if people are willing to take up loans, and when the money is decreasing in value, due to deflation or some other process with the same effect, they'll be hesitant to do so since they'll be forced to pay back what amounts to a larger and larger value.

That just means that interest rates will decrease to compensate. If anything, the lower interest rates attract more investors.

 

[CapelDodger]

FX costs are the tiniest proportion of trade costs.
Compared with tarriff, regulatory, customs, insurance costs etc. that are associated with international trade, and could be far more easily reduced, they aren't even worth measuring.

By comparison, the cost imposed by a single currency are of a significant magnitude - even in a country like the US.

A chunk of that cost has been income for me, and I lived pretty high on the hog from it. Not as much as some, but pretty well. It isn't just conversion costs that matter, it's currency uncertainty, which leads to hedging - also a cost.

As I said, in principle a single currency is desirable since these costs are artificial. Ditto tariffs. Regulatory costs - health and safety, consumer protection, environmental standards etc. - are there for good reasons. So is insurance.

For example the Euro area is bearing a massive cost for their single currency, just as the Eastern Lander in Germany did before that.

What cost? East Germany took a nose-dive because it was dominated by inefficient, state-supported industries. It was one of those failed socialist states we've all heard of. The one-to-one Ostmark exchange-rate was a mistake because it damaged West Germany, not the East. In the East it meant that there was more capital available to modernise industry. In the West it meant monetary restriction to prevent inflation. The effects are still being felt, not because of the single currency but the politically-motivated, economically disastrous echange-rate.

Other countries that are at the limit of their optimal currency area include Italy, the UK, and France - all of which would probably be better off if the split into separate monetary areas.

The UK isn't in the Euro, of course. Within the UK the exchange-rate is determined by the performance of the financial sector, concentrated in London. The industrial regions (they still exist, just about) such as South Wales and Scotland have to put up with it. These regions would be better off with their own currencies - or the Euro, which is not so dominated by one economic sector.

But if you want a good example of the absurdity of stretching monetary areas too widely, just go to Argentina, which Dollarised.

An example of a government manipulating the exchange rate so as to produce a short-term, unsustainable boom. Had Argentina been a US state, using the US dollar as they do, it could never have gone up that cliff it fell off.

A single global currency will always be a ridiculous idea from this perspecitve alone.

In principle, a single global currency is a benefit to trade. Because of that, it might someday come about. But in the long term we're all dead, of course.

 

[bjornart]

There is an increase in labor resources. Same effect.

Not really. The freeing up of capital allows investment in something new. An increase in labor resources proportionally increases demand, and if it's utilised increases production. The economy grows in the number of people and number of widgets only, since the supply of a medium of exchange is limited.

You're correct; increases in labor resources is different. And the third function, natural resources, can also play a role if, for example, new, easy-to-get-to sources of widget-making material is found. But it's all the same effect.

And it's not an effect you consider disadvantageous?

That just means that interest rates will decrease to compensate. If anything, the lower interest rates attract more investors.

But interest rates can only sink so low. Money is getting more and more valuable, no investment objects seem likely to give higher returns than just holding on to the cash, holding on to the cash causes increased "pseduo-deflation", increasing the insentive to hold on to the cash...

 

[shanek]

Not really. The freeing up of capital allows investment in something new. An increase in labor resources proportionally increases demand, and if it's utilised increases production. The economy grows in the number of people and number of widgets only, since the supply of a medium of exchange is limited.

True, but it's still the case that the widgets drop in price without deflation. The productivity of the economy has increased.

And it's not an effect you consider disadvantageous?

It might be disadvantageous to certain investments, but then, it would be advantageous to others.

But interest rates can only sink so low.

Not really true. Treasury bonds during the Great Depression actually gave a negative interest return. And if you think about it, that actually makes sense.

Let's say, for example, that there's deflation at 3%. With deflation, you want to hold on to all the cash that you can. You have some options. You can just stack it all in your house; but if you do this, you're going to want to put it in a safe and maybe even hire some private security to guard it. That costs money. Or you can put it in a bank's safety deposit box (as opposed to an account), and that'll also cost money.

Or you can buy Treasury bonds at, say, -1%. This is as secure as anything, and you're essentially paying 1% of the value of your money per year for someone to securely hold on to it. Logically it's the same thing.

 

[Drooper]

A chunk of that cost has been income for me, and I lived pretty high on the hog from it. Not as much as some, but pretty well. It isn't just conversion costs that matter, it's currency uncertainty, which leads to hedging - also a cost.

As I said hedging costs are tiny in relative terms.

As I said, in principle a single currency is desirable since these costs are artificial. Ditto tariffs. Regulatory costs - health and safety, consumer protection, environmental standards etc. - are there for good reasons. So is insurance.

A single currency is not desirable, as I stated earlier. It may or may not be suitable for a particular arbitrary area.

What cost? East Germany took a nose-dive because it was dominated by inefficient, state-supported industries. It was one of those failed socialist states we've all heard of. The one-to-one Ostmark exchange-rate was a mistake because it damaged West Germany, not the East. In the East it meant that there was more capital available to modernise industry. In the West it meant monetary restriction to prevent inflation. The effects are still being felt, not because of the single currency but the politically-motivated, economically disastrous echange-rate.The UK isn't in the Euro, of course. Within the UK the exchange-rate is determined by the performance of the financial sector, concentrated in London. The industrial regions (they still exist, just about) such as South Wales and Scotland have to put up with it. These regions would be better off with their own currencies - or the Euro, which is not so dominated by one economic sector.[/B]

The effects of German monetary union are still being felt partly because of:

1. lack of nominal currency adjustment between Eastern and Western and Lander, and
2. lack of nominal currency adjustment between Germany and the rest of the Eurozone.

On the second points you raise, I think you misunderstood my post. I stated that the UK itself, Italy itself, Germany itself are at the limits of an optimal currency area and could possibly benefit from regional currencies.. This you acknowledge youself.

In fact you seem to get a bit muddled here. You state that a single currnce imposes no costs and then you claim that regions within Europe would benefit from seperate currencies.

An example of a government manipulating the exchange rate so as to produce a short-term, unsustainable boom. Had Argentina been a US state, using the US dollar as they do, it could never have gone up that cliff it fell off.
In principle, a single global currency is a benefit to trade. Because of that, it might someday come about. But in the long term we're all dead, of course.

Argentina was not a case of a government maniipulating an exchange rate.

They dollarised the economy. The dolar was the official currency of Argentina. It was effecitvely in a unilateral monetary union with the US. But it was not an optimal currency area and a large economic shock, which effected Argentina more than the US led to MASSIVE costs for the Argentinian people.


The fact is the thought of widespread common currencies appeal to laymen. But the literature and stylised facts suggest that the imposition of monetary unions accross heterogeneoous economies, with limited labour mobility tend to impose very large cost due to the way the prevent nominal relative price adjustment. This is something the Euro area is proving now.

I suggest you go read the literature on optimal currency areas, it is quite interesting. An interesting statistic to note is that labour mobility in the US is about 20 times that of Europe

 

[bjornart]

True, but it's still the case that the widgets drop in price without deflation. The productivity of the economy has increased.

It might be disadvantageous to certain investments, but then, it would be advantageous to others.

Not really true. Treasury bonds during the Great Depression actually gave a negative interest return. And if you think about it, that actually makes sense.

Let's say, for example, that there's deflation at 3%. With deflation, you want to hold on to all the cash that you can. You have some options. You can just stack it all in your house; but if you do this, you're going to want to put it in a safe and maybe even hire some private security to guard it. That costs money. Or you can put it in a bank's safety deposit box (as opposed to an account), and that'll also cost money.

Or you can buy Treasury bonds at, say, -1%. This is as secure as anything, and you're essentially paying 1% of the value of your money per year for someone to securely hold on to it. Logically it's the same thing.

I'm disinclined to believe it will always magically even out though. So unless you've got something short enough to post here that isn't "but you'll want to buy a safe, or give your money to the bank", I guess I'll remain unconvinced on the hole gold standard thing. Less skeptical than before, yes, but in the end it seems inflexible (which is of course also an upside, especially if you're terrified of governments) and impractical.

 

[CapelDodger]

As I said hedging costs are tiny in relative terms.

They are still artificial costs with no benefits for efficiency of production or transport, so they impede trade for no good reason. In principle, therefore, doing without them is desirable (unless you live amongst the money-changers). The absolute amounts are irrelevant to the argument.

The effects of German monetary union are still being felt partly because of:

1. lack of nominal currency adjustment between Eastern and Western and Lander, and
2. lack of nominal currency adjustment between Germany and the rest of the Eurozone.

Are you saying that monetary union has led to a fall in East German living standards or productivity since the fall of the Wall? Not the failed socialist economy? How exactly do you distinguish between the effects of the bankruptcy of that economy and those of monetary union with West Germany? East German industry wouldn't have suddenly become competitive by converting to a fully-traded currrency. And with Russian oil supplies also becoming fully-traded, rather than subsidised within Comecon, the results would have been disastrous. A flood of refugees would have headed westward.

On the second points you raise, I think you misunderstood my post. I stated that the UK itself, Italy itself, Germany itself are at the limits of an optimal currency area and could possibly benefit from regional currencies.. This you acknowledge youself.

In fact you seem to get a bit muddled here. You state that a single currnce imposes no costs and then you claim that regions within Europe would benefit from seperate currencies.

Given that trade currently takes place in a multi-currency environment, regions such as Wales would indeed benefit from being part of the Euro, or at least out from under the dead weight of the City. A single world currency would be even better.

Argentina was not a case of a government maniipulating an exchange rate.

They dollarised the economy. The dolar was the official currency of Argentina. It was effecitvely in a unilateral monetary union with the US. But it was not an optimal currency area and a large economic shock, which effected Argentina more than the US led to MASSIVE costs for the Argentinian people.

The official currency of Argentina is the Argentinian peso, and has been for a long time. Dollarisation involved the government backing the currency with dollars at a fixed rate. If that's not manipulation, I'm at a loss. It had no control over the US money supply, and the US did not take Argentina into account when making monetary decisions. The peso being over-valued, there was a distinct sucking sound and Argentina's dollar reserves disappeared. When the government could no longer redeem pesos with dollars, splat.

The fact is the thought of widespread common currencies appeal to laymen.

As more an unfrocked priest, I also find them appealing.

But the literature and stylised facts suggest that the imposition of monetary unions accross heterogeneoous economies, with limited labour mobility tend to impose very large cost due to the way the prevent nominal relative price adjustment. This is something the Euro area is proving now.

(Stylised facts? Que?) What the Euro is proving is that inefficiencies previously covered-up by inflation and devaluation need to be addressed. If you can't do something competitively, don't do it. Do something you can be competitive at. Division of labour - regarded by most as a something desirable.

I suggest you go read the literature on optimal currency areas, it is quite interesting. An interesting statistic to note is that labour mobility in the US is about 20 times that of Europe

It's hardly surprising that labour mobility is higher in a society descended from people who crossed an ocean - voluntarily or not - just to start the thing, and has subsequently spread across a large part of a continent in a couple of centuries. (And has had a single currency, which would tend to increase labour mobility, since a new currency is one thing you don't have to get used to). Europe filled up a long time ago, but there was significant mobility beforehand. Late Roman times, for instance; there was a lot of to-ing and fro-ing around then. (Damned Saxons.) Scandinavians, Magyars, Slavs, it was all go for a good while.

I've read a lot of argument against globalisation, and I'm not convinced. As long as there's a level playing-field, so to speak, and externalities are properly taken account of, I see no problems with it. In fact, I see it as inexorable and inevitable absent a major economic breakdown.

 

[shanek]

I'm disinclined to believe it will always magically even out though. So unless you've got something short enough to post here that isn't "but you'll want to buy a safe, or give your money to the bank", I guess I'll remain unconvinced on the hole gold standard thing. Less skeptical than before, yes, but in the end it seems inflexible (which is of course also an upside, especially if you're terrified of governments) and impractical.

Fine. I really can't explain it any better without going really at length, in which case you're better off reading the Rothbard book I linked to.

 

[CapelDodger]

A single currency is not desirable, as I stated earlier. It may or may not be suitable for a particular arbitrary area.

Stated, but failed signally to demonstrate. What do you see as the benefits of multiple currencies?

 

[Shane Costello]

Originally posted by Capel Dodger:
Stated, but failed signally to demonstrate. What do you see as the benefits of multiple currencies?

The ability to set interest rates. At the moment Ireland has to deal with interest rates set by the ECB that aren't suitable to the countries needs.

The official currency of Argentina is the Argentinian peso, and has been for a long time. Dollarisation involved the government backing the currency with dollars at a fixed rate. If that's not manipulation, I'm at a loss. It had no control over the US money supply, and the US did not take Argentina into account when making monetary decisions. The peso being over-valued, there was a distinct sucking sound and Argentina's dollar reserves disappeared. When the government could no longer redeem pesos with dollars, splat.

Something similar existed in Ireland from 1929 until the late 70's. We may have had a currency called the punt, but in effect it's value was tied to sterling and there was a currency union between Britain and Ireland.

 

[CapelDodger]

The ability to set interest rates. At the moment Ireland has to deal with interest rates set by the ECB that aren't suitable to the countries needs.

Ireland has to deal with the interest rates that lenders will lend at, which depends on the lendee and the purpose for the loan. I don't personally favour governments determining interest rates, and in practice they have little real control in today's global market system. Apart from attracting the attention of hot-money merchants and speculators. If the Irish economy is overheated - and I'm quite preapred to accept that - the market should recognise the shortage of real investment opportunities and demand a risk premium.

Something similar existed in Ireland from 1929 until the late 70's. We may have had a currency called the punt, but in effect it's value was tied to sterling and there was a currency union between Britain and Ireland.

The UK economy suffered from an over-valued currency from the 50's to the 80's. Not that it hasn't been very successful, but it could have been more so had sterling not been a reserve currency. Post-imperial policy was to require the use of sterling as a reserve, in order to maintain the over-valuation. Go figure. The US is going through an identical experience, and doesn't seem to realise it. That's a lot easier to figure, given the crew in charge.