Sunday, May 5, 2013

Antal Fekete at The Daily Bell



DB: This is a great interview with Professor Fekete because in it he abandons some of the vocabulary that tends to confuse people who don't have a sufficiently high intellect to understand him, which means almost everybody.

BM: Agree, speaking as one of those who doesn’t have sufficiently high intellect.  Fekete also did a good job of remaining on good behavior.

AF: World trade is facing an avalanche-like transformation flattening out monetary economy into barter economy.

BM: If true, the majority of the population in developed economies is done for. 

AF: Gold is a monetary metal due to the fact that its marginal utility declines at a rate lower than that of any commodity.

BM: But, admittedly, it does decline.

AF: For this reason gold does not obey the Law of Supply and Demand.

BM: Fortunately, this was stated simply enough for me to understand.  It is statements like these that cause me to look askance at Dr. Fekete. 

Gold has been in the market for thousands of years – has no economist before ever noted that the law of supply and demand is not applicable to this commodity?

All commodities, including money – the most marketable commodity – are subject to supply and demand; if not, how could money be money?  Fekete even suggests that gold has a declining marginal utility.  It does not have a constant marginal utility. It is subject to supply and demand.

AF:  My own position is that manipulation in the gold and silver markets, if that's what's been occurring, is far less important than it is made out to be by market observers.

BM: Agree.  It is difficult to even understand what market manipulation means when every financial market is subject to the non-market backstop of central banking and state-regulation.  All markets are manipulated – there is nothing terribly special about the gold market manipulation.

AF: I don't have much respect for Hayek's position that choosing the monetary standard should be "left to the free market". The market has already spoken.

BM: Then there is little to fear.  The only way to ensure a sound financial system is to allow the market to speak – any other avenue is central planning, and this cannot stand because it suggests no foundation of understanding by market participants.

AF: The value of gold, like the length of the yard, is not subject to individual preferences or to market forces.

BM: On this, I will simply disagree.  Suffice it to say, if this was true, everyone would clamor to own gold, regardless of price (and yes, I am differentiating “price” from “value”).

AF: Instead of saying that there is too much or too little gold, it would be more accurate to say that the rate of interest is too high or too low.

BM: I appreciate the simplicity by which this way of looking at it is stated.  I suspect there may be some differentiation (are long-term or short-term interest rates applicable?), but as far as the statement goes, it is outstanding in its simplicity.

AF: We may recognize ZIRP (Zero Interest Rate Policy) of Bernanke as an imitation of the scheme of Gesell.

BM: This is quite correct, and Bernanke has implemented greenbacker policy – the state is issuing the money to fund the state’s spending, at virtually zero cost.  For this reason, Brown turned from being a critic of Bernanke to a fan. 

Further, Fekete’s criticism of Gesell’s Freigeld theory is sound.

AF [regarding “Real Bills”]: This is not inflationary because the ephemeral cash arises together with the rise of the new merhandise in production, and it expires simultaneously with the removal of the merchandise from the market and with its disappearance in consumption.

BM: It is most certainly inflationary to the money supply, therefore it is distortive; it may or may not be inflationary to prices.

AF [regarding the state as necessary toward the market for “Real Bills”]: Absolutely not.

BM: Thank you!  I agree, the state is not necessary, and it is reasonable to expect that such a market would come forth naturally, through the actions of market participants.

AF [regarding state-mandated accounting standards]: If the government can make them, it can also scrap them, it can ignore them overtly or covertly.

BM: Thank you, again!

AF [regarding why the Rothbardian Austrians are dismissive of the “Real Bills Doctrine”] The Real Bills Doctrine is a thorn in the flesh of the Quantity Theory of Money to which the Rothbardians are uncritically committed.

BM: This comment confused me more than anything in the interview.  The Rothbardians are uncritically committed to the subjective theory of value.  How then can they also be uncritically committed to the Quantity Theory of Money?  Somewhere, there is confusion.

In any case, I believe the Rothbardian criticism is due to the fractional reserve nature of real bills.  That real bills are fractional reserve is without a doubt – Fekete even says so, in his reply to the Rothbardian criticism of fractional reserve banking, when he writes:

“Fractional reserve banking is fraud, in whatever shape and form it may come – they say. However, there is such a thing called self-liquidating credit that Rothbardians refuse to recognize. It is represented by real bills covering goods in most urgent demand and moving to the ultimate consumer with all deliberate speed.”

AF: The demise of the system of irredeemable currency is a foregone conclusion. Not only is it illogical; it is also immoral. A free society cannot be built on a coercive basis. Moreover, the regime of irredeemable currency is incompatible with the ideal of limited government.

BM: The truest words spoken in this interview.  A fabulous statement.

11 comments:

  1. "AF: The demise of the system of irredeemable currency is a foregone conclusion. Not only is it illogical; it is also immoral. A free society cannot be built on a coercive basis. Moreover, the regime of irredeemable currency is incompatible with the ideal of limited government.

    BM: The truest words spoken in this interview. A fabulous statement."

    I agree that a free society can't be based on coercion. I don't agree that "irredeemable currency is incompatible with limited government."

    Irredeemable currency is inevitable in the Information Age and beyond. Gold can't be transmitted over the wires meaning that some form of digital proxy for gold must be used. And once that happens, gold is no longer the actual medium of exchange.

    And if digital currency is tied to gold and everyone were to redeem their digital tokens, the very basis of the monetary system vanishes and chaos ensues. And there is the real risk that the digital tokens will be surreptitiously inflated by the issuing entity.

    Digital money tied to gold could be issued on the basis of nonredeemable tokens but then what purpose does the gold serve other than fixing the supply?

    The key to solving the monetary crisis though is ultimately a matter of solving the underlying and more significant political crisis with a political system that has integrity.

    If you care to, I invite you to read my blog page on valumatic money of plenarchy (or what I call "true money") and comment. Be as critical as you want. This concept though I think will work only in the context of the voluntary state with political integrity.

    http://plenarchist.wordpress.com/2011/12/23/the-valumetric-economy-an-introduction/

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    1. plenarchist, in the coming days I will read your post and comment if I believe I have something worthwhile to write.

      In the meantime, without the ability to redeem, abuse cannot be so easily checked by the market. If that abuse is committed by the government, that government will not remain limited.

      At least this is what I believe for now. Perhaps this will change once I read your post.

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    2. That's great. You have been a thoughtful commentator so I look forward to your opinion if you want to offer it.

      Concerning irredeemable currency, maybe my post will offer to you not only a way for it to work but I believe the only way it can work in the information age and going forward.

      You put your finger though on the real problem. Any monetary system can work if the political system works and vice versa.

      I don't think any monetary system imaginable can be successful if the underlying political system is corrupt. Even under a gold standard, a corrupt government will make for corrupted money.

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  2. "BM: Agree, speaking as one of those who doesn’t have sufficiently high intellect. Fekete also did a good job of remaining on good behavior. "

    This is key to convincing readers, I think. Most of us don't have the intellectual horsepower or time to fully research every investment, even if merely one of belief, that we make, so we must rely on what our "gut" tells us. We naturally resist force or fraud, and these are almost always found in company with arrogance and authoritarianism. On the internet, where the stakes are so low, a hard sale usually means No Sale.

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  3. Thanks for the link here from The Daily Bell, and your efforts.

    Your stuff is always interesting, especially the bits about The Middle Ages.

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  4. AF: Gold is a monetary metal due to the fact that its marginal utility declines at a rate lower than that of any commodity.

    gpond: Or, does its marginal utility decline at a rate lower than of any commodity due to the fact that it is a monetary metal?

    Is this a circular argument?

    This assertion, and the 'logic' that therefore gold does not follow the laws of supply and demand were the most eyebrow-raising parts of Dr. Fekete's presentation.

    Do any BM readers understand from where this thinking comes? Care to explain it?

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    1. To say that its marginal utility declines at a rate lower than other commodities is to say that each additional unit of gold that one acquires is almost as useful as the previous unit. I believe that this is a fancy way of saying that it is the most marketable commodity (ie. money). Its marginal utility then comes from the fact that you can always buy things with it. And the world is a big place, so there is always something to buy, until you have bought the whole world. Its marginal utility declines very slowly.

      But this is the same thing as saying that gold is money. More money (or more of the most marketable commodity) is always good for an individual.

      So I don't see how it is a monetary metal "DUE TO THE FACT" that its marginal utility declines at a lower rate than other commodities, but rather that its marginal utility declines at a rate lower than other commodities because it is considered to be a MONETARY metal.

      I'm trying to prime the pump of conversation here. Am I missing something important in my thinking here?

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    2. gpond, I did not comment earlier as your invitation was for one who understood Fekete's thinking here. I do not - his statement about supply and demand re gold baffled me. The statement you highlight offers additional bewilderment.

      "...but rather that its marginal utility declines at a rate lower than other commodities because it is considered to be a MONETARY metal."

      This rings true. Gold is considered a monetary metal because it has characteristics that make it most ideal for serving the purpose of money. Because of these characteristics, it acts like one would expect good money to act: with a marginal utility that declines less than that of other commodities / goods.

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    3. gpond:
      To say that its marginal utility declines at a rate lower than other commodities is to say that each additional unit of gold that one acquires is almost as useful as the previous unit. I believe that this is a fancy way of saying that it is the most marketable commodity (ie. money).

      Anatale Fekete:
      To say that the marginal utility of gold declines more slowly than that of any other good is just another way of saying that the most marketable good within the observation of man is gold.

      gpond:
      Aha!!!


      - See more at: http://www.thedailybell.com/exclusive-interviews/34698/Anthony-Wile-Dr-Antal-Fekete-on-Real-Bills-Quantity-of-Money-Theory-and-the-New-Austrian-Economic-Manifesto

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