In Defense of GwBC: Conclusion

I am confident I have accomplished all I meant to accomplish with this series of posts, stimulated as they were by Gravelle's critique of my book, GwBC. In conclusion, I will speak to the notion, widespread today, and present in Gravelle's review, that a moderate and non-accelerating level of inflation is a good thing, in that it is predictable on the one hand and it accomodates the growing demand for money that comes with a growing population and economy on the other. This notion is presumably why Gravelle instructed me that only an "accelerating" rate of inflation should be considered "easy money."

This underlying idea is a fallacy. Price level unpredictability is one of the kinds of harm that inflation can do, but not the whole of it by any means. Yes, if every price and every wage reliably increases at, say, 2 percent a year every year: buyers, sellers, lenders, investors and so forth can all quickly become accustomed to this, draft contracts that presume it, etc. The predictability would be a positive thing, and the debasement of the currency would be merely a matter of form, not something that ought to bug anyone. That is what many economists (and Gravelle) seem to presume actually happens in real-world inflation when they write as if a “non-accelerating” rate is benign.

But in the real world, the average price levels measured by consumer prices indexes and so forth are just that, averages. If we know that the CPI has increased 2% over the last year we have no reason to believe that every good – even every good and service explicitly included in the CPI – even any respectably large number of those goods for that matter -- has increased by that benign-seeming amount. Nor do we know that there is some narrow range of possibility around 2% where most price changes comfortably reside. You can of course quickly get in over your head trying to wade a stream with an “average” depth of only half a foot.

A related point: new money infused into the economy doesn’t come into it all at once. It isn’t as if helicopters have dropped it evenly over the whole landscape, or as if we could all wake up one random morning with more money in our bank accounts than we had thought we had the day before.

No … money enters the economy because the Federal Reserve buys assets. If you’re one of the lucky few who get to sell assets to the Fed then, poof!, the new money suddenly appears in your bank account first. The new money in time radiates outward from the first recipients to those with whom they do business, and so forth, out to ‘the economy at large’ if we may. But the process is a sloppy one, and it does in the nature of things create winners and well as losers. It redistributes real wealth and creates perverse incentives, even if it is kept at a slow and non-accelerating rate over time.

A related fallacy is the notion that inflation is a good thing because a growing economy needs a growing money supply. Why? In a free market the prices will automatically adjust should the economy grow more rapidly than the money supply. Suppose the money supply is linked to gold, and privately held gold supplies are freely convertible into paper notes. If the supply of gold falls beneath demand, gold becomes more valuable. This means that gold in jewelry is converted into monetary use, and gold coins that had been hoarded, stashed away in a safe, are brought out and put back into circulation. Also, promising gold mining operations become more valuable and people line up to invest in mining technologies.

In the meantime, since gold is becoming more valuable, in such an economy, prices of all non-monetary goods are falling. We’ve just conjured up a deflationary scenario. A lot of energy has gone into persuading people that deflation is necessarily disastrous, but there is no evidence it needs to be.

My final thought in this connection is the eminently pragmatic one, that we shall all have to do a lot of new thinking, in matters economic and financial, in order to get ourselves out of the mess in which through the old thinking, still the mainstream thinking, we have gotten ourselves.

In Defense of Gambling with Borrowed Chips, Part V

My book, Gambling with Borrowed Chips, calls for the abolition of legal tender laws.

For a sense of what that means, dear (American) reader, please take a dollar out of your wallet. Above and to the left of George Washington’s head, you’ll see in small print the words, “The Note is legal tender for all debts, public and private.”

Once upon a time, not too long ago, the words in that spot offered the prospect of redemption of the dollar bill in specie, gold or silver.

Between the one sort of engraved bill and the other, the notion of a “legal tender” stipulated by law has replaced the idea of redemption by a backed currency. The system of fiat money, then, is one in which legal tender laws require people to accept unbacked paper that they might not otherwise take, arbitrarily forcing a medium of exchange upon the populace. For those who like the particulars of codification: the “legal tender” status of these bits of paper is secured at 31 USC §5103.

Those of us who speak of repealing legal tender laws, are, then, in effect proposing a return to commodity backed money. We speak this way not for the delight of talking in codes, but simply as a way of focusing on the difficulty: not so much what the government isn’t doing, but what it is doing (installing its paper by fiat as the Ur-money).    

I don’t really feel like a “gold bug.” I do believe there are lots of ways of hardening a money supply, as I mentioned in yesterday’s entry. Still, for the remainder of our discussion (and we near its end), I will accept the shorthand account of what I am proposing here. I am advocating a gold standard as a geology-backed medium of exchange.

When Gravelle writes: “In fact, most economics textbooks, for good reason, devote no more than a page or two to explaining the gold standard and how the U.S. and other countries’ economies moved away from commodity money to fiat money….” she merely confirms my own pessimistic assessment of the textbook publishing industry.

She then adds her own definition of “fiat money” in a parenthetical comment. She calls it “money backed by the promises of the government.” Sorry but, no. This is not what it is! The promise of the government to do …? Fiat money is backed only by the demands of the government, as expressed 31 USC §5103. There is no “promise” involved. That word suggests the long-discontinued redemptions.

But then say: for purposes of discussion, let us make this about gold.

Gravelle writes: “Faille seems to believe that the gold standard was restored after World War II, but that standard only applied to international transactions and even then only in a limited fashion.”

She suggests here that I am confused about the nature of the Bretton Woods monetary system. In fact, I explain explicitly that “U.S. citizens were not allowed to convert their dollars into gold” during the Bretton Woods period. I also say, though, that through the Bretton Woods accords the U.S. “committed itself to tying the value of its dollar to the price of gold.” Both assertions are true. Yes, the tie in question was not what it had been before 1933, or before the creation of the Federal Reserve twenty years before that, but all that establishes is that there is more than one way to harden the money supply, even more than one way to alloy it with gold.   

Indeed, in December 2011 (too late, alas, for mention in Gambling with Borrowed Chips) the Bank of England issued a white paper, its “Financial Stability Paper No. 13,” that reviews the global financial crisis from a monetary perspective and that confirms many of my book’s points.

The authors of this paper – Oliver Bush, Katie Farrant, and Michelle Wright –list three objectives for an international monetary and financial system: internal balance, allocative efficiency, and financial stability. They conclude that the system now in place “has performed poorly against each of its three objectives, at least compared with the Bretton Woods System.”

The key fact about gold is that its supply is limited by the nature of the planet we’re on, and that adding new gold supplies to the world system will always require investment, risk, and expenditure. Such additions cannot be accomplished by fiat. This is why Robert Zoellick, former president of the World Bank, said recently, “The system should … consider employing gold as an international reference point of market expectations about inflation, deflation, and future currency values.”  Indeed it should.

The problem, finally, is that the "business cycle" is not really a circle. The turns don't leave us where they found us. The business cycle is in many respects a downward spiral. So long as we grease up the money making machinery each timne around to save us from each bust, we preserve old inefficiencies and create new ones. In the best of times they are hidden, in the worst of times they are obvious. We should take advantage of that obviousness to address them head on.

That is my point, and I am happy -- or at least content -- to have gone outside of the mainstream to make it.

There is just one final point I need to make, and this arises from Gravelle's casual observation in her review that the only worrisome symptom of "easy money" would be "accelerating inflation while at full employment." I passed that remark by rather lightly in an earlier entry in this series. Tomorrow I hope to come back to it. It gives us a bang-up close.

In Defense of Gambling with Borrowed Chips, Part IV

We now get to the core of our dispute. (“At last!“ you cry.) Lament not, for we have passed through some essential preliminaries.

What is core is that Gravelle takes issue with my recommendation that the U.S. abolish its central bank, the Federal Reserve.

She says (quite accurately) that the Federal Reserve existed for 20 years before the abandonment of the gold standard in 1933. The Fed was founded by an Act signed into law by President Woodrow Wilson on December 23, 1913.

I can’t agree with her about the “why” of that decision, though. She writes that the Fed was “needed in part to deal with the rigidity of the gold standard itself, which provided insufficient money, particularly around harvest time.”

No, the Fed wasn’t needed. It came into existence as a simple matter of coalition management. What was needed, politically, was the passage and enactment of something that could be called a “banking reform bill.” There were a lot of reasons for this, most of them terrible, the best of them only slightly muddled. But the vacuity of the Federal Reserve Act as any sort of genuine reform may be seen by the four distinct currents of thought that contributed to it.

There were some important voices at the time who wanted a private and centralized banking system. They found their champion in Nelson Aldrich. There were others who wanted a system that would be private but decentralized -- this was the guiding idea of Carter Glass, chairman of the House Banking Committee when Wilson entered the White House. There was another group who demanded a system both public and decentralized -- that would describe William Jennings Bryan, for example, who was Wilson’s Secretary of State, and whose interest in monetary/banking issues was a critical source of his own appeal to his own following. Finally, there was a faction that wanted a system both public and centralized, in effect an adjunct to the U.S. Treasury. Among these was William Gibbs McAdoo, who was Wilson’s Secretary of the Treasury.

[You can find an account of all of this in the biography, Woodrow Wilson (2010), by John Milton Cooper Jr., which I reviewed for The Federal Lawyer that spring. See especially pp. 219 et seq. of that book. ]

Along the two axes involved (private/public on one side, central/decentralized on the other), there were then four possibilities and for various mutually inconsistent reasons all four factions were unhappy about the banking system, all four wanted a change. Some change was almost certain to come about, and that change (when nominally led by a Wilson, a man with no firm settled convictions of his own on the subject, but a strong desire to please everyone, or at least everyone with a suitably progressive pedigree) was bound to be a jerry-rigged mess.

We have inherited that mess, and I for one am certain that it does us all much more harm than good.
It was merely a mess for the first twenty years of its existence. After 1933, it became something much worse than a mess. The Fed became a nexus of power in its own right, and the center of machinations against the soundness of the dollar. There are always such machinations -- and there are always constituencies for them. What has proven disastrous is that they have had this great institutional leverage.

Their leverage was somewhat diluted by the Bretton Woods accord of 1944, which brought a precious metal back into the system. That brings us to the relation of hard metals and gold in particular to the value of money, which is the fourth and final point I must contest with Ms Gravelle.

Before I do, though, allow me to say this: gold is not logically necessary for the existence of a sound currency. There are other ways of achieving that goal. For example, as I write, the Republic of Greece stilll has a sound currency. That currency is known as the euro, and it is sound because its quantity is outside of the control of any politicians or central bankers within Greece. Thus, the soundness of the currency (which is as it happens not backed by gold) is forcing the Greek political system to make difficult decisions -- decisions that ought to be made but that all participants there would plainly much rather avoid.

It  is possible that Greek politicians may in fact avoid those decisions by abandoning their sound currency, and re-creating the drachma, which they can then manipulate at will. If they succumb to that temptation, though, they will I am sure rue the day.

With that understood, allow me to agree: yes, the abolition of fiat currency means, in the U.S. context and as a practical matter, the re-introduction of some role for gold. This is the one of my policy prescriptions that I haven’t yet discussed, and I will come to it tomorrow.

Rothbard on Bryan

Murray Rothbard on the rise of William Jennings Bryan and Bryanism in the Democratic Party.

"Poor Grover Cleveland, a hard-money laissez-faire Democrat, was blamed for the panic of 1893, and many leading Cleveland Democrats lost their gubernatorial and senatorial posts in the 1894 elections. The Cleveland Democrats were temporarily weak, and the Southern-Mountain coalition was ready to hand. Seeing this opportunity, William Jennings Bryan and his pietist coalition seized control of the Democratic Party at the momentous convention of 1896. The Democratic Party was never to be the same again."

That may require some explanation. The notion of a "pietist coalition" is key to Rothbard's understanding of US political history. The pietists were and are a certain subset of Protestant groups -- generally from those denominations that see themselves as most fiercely anti-papist, anti-hierarchal, etc. -- and they believe Christians must prepare the way for the coming of the Lord by creating just social conditions first, i.e. Jesus' return shall be "postmillennial." Thus, the state (as Rothbard conveys the pietists' view of it) must be controlled by pious folks and so organized as to hasten that glorious day.

The era of Andrew Jackson -- the President that Rothbard sees as most embodying his own laissez-faire ideas -- was also the era of the Second Great Awakening -- the revivalist movement that brought pietism in this form to the US in a big way. Pietists wanted to control both people's personal lives (through the prohibition of alcohol and Sunday closing laws for example) and the counrtry's economic life, through control of the money supply and tariffs on foreign trade. The great political divide was then, between the Democrats, who were laissez-faire on both personal and economic matters, and the Whigs or later Republicans, who were statist on both sets of matters.

Cleveland is the last figure in US political history to whom Rothbard extends any sympathy. The rise of Bryan meant the pietists had taken over both parties, and everything has been pretty steadily downhill ever since.

A World Without A Monetary Superpower

What will become my chapter 12.

On April 18, 2011, one of the Big 2 major credit raters, Standard & Poor's revised its "outlook" on its long-term rating for U.S. Treasury debt from stable to negative.

This news was left in the provinces visited mostly by financial-news wonks, while sleeping air-traffic controllers and a continuing civil war in Libya (and the pseudo-campaign of possible Presidential hopeful Donald Trump) continued to get headlines. Syill, the S&P announcement was yet another straw in a wind that had been blowing for some time already -- the emergence of a world in which there will be no hegemonic economic/financial superpower.

Our business in this chapter is an examination of the consequences of a truly multi-polar financial world.

Note that El-Erian, in the blog entry to which I've just linked, refers to the "risk free" standard as one of the "global public goods" that US hegemony provides. What he means to ask is:
how will anyone make use of the Black-Scholes formula if the US Treasury gets an S&P downgrade? Any use of the formula requires a value for “r,” the risk-free rate of return. My understanding is that T-bills have provided a proxy for r.

I raised this issue in the comments section of one of Felix Salmon's blog posts. Another commenter responded, "Observe option prices, assume put-call parity, and back out r."

But back to S&P. Along with the words of caution, it re-affirmed AAA sovereign credit rating for the US. Why would it do both of those things? As Einstein noted, everything is relative, and the US can only really be measured against the handful of other countries that have the coveted AAA rating. Yet in that company, it has earned its downgrade: "Even in our optimistic scenario we believe the US's fiscal profile would be less robust that those of other AAA rated sovereigns by 2013."

On a related front, Robert Zoellick, president of the World Bank Group (2007-), one-time U.S. Trade Representative (2001 - 2005), one-time Goldman Sachs managing director (2006-07), spoke in November 2010 about the need to “look beyond Bretton Woods.”

Actually, we've all been "beyond" Bretton Woods for about 40 years now. What I take it Zoellick means is that the diplomats and international finance bigwigs to whom he was addressing himself should look to fix the free-float of all-against-all that replaced it, and that they shuld seek to do so by moving forward not back.

We're building on chapter 6 especially here. Will not repeat its historical lessons. Let's focus, instead, on what Zoellick meant by this.

He seems to have in mind especially a sort of G2, an accord between the US and China to share a leadership position. "The U.S. and China could agree on specific, mutually reinforcing steps to boost growth," then to create "wide bands for exchange rates" and finally to work out a new series of market-opening trade agreements. The reference to the G2 agreement on exchange rates suggests that there could be a shared numéraire role. A numéraire is the currency-of-currencies, the one (or two?) that may be said to back the others.

I have to dissent from RZ here, the idea of 2 currencies sharing that role, especially when they are the currencies of countries so different, seems to me unworkable. Explain why.

RZ also says this: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

One or more major currencies links or re-links itself to gold, and then floats freely re: the other. Competing to acquire the status of numéraire.

Or, forgetting RZ, the US could take unilateral action in another direction, without the stigma of gold but perhaps with the same benefits. Repeal the special legal tender status of the dollar domestically, allow competing currencies. The winning currency within the US market will be in a sound position for export.

Colonel Roosevelt and Secretary Bryan

"Colonel Roosevelt" is the title of a new book by Edmund Morris, the final installment in his series on the life of Theodore Roosevelt, focusing on TR's post-Presidential years. I admit up-front I haven't read the book. I have only read the paraphrases and quotations from it provided by some reviewers, including Henry S. Cohn, who reviewed it for the latest issue of The Federal Lawyer.

Cohn paraphrases Morris thus: "Roosevelt could abide neither Wilson nor his secretary of state, William Jennings Bryan, who viewed the war as an exclusively European affair. Roosevelt spoke out against the 'pacifist' Bryan until he was removed from the cabinet in June 1915 and, in April 1917, Wilson asked Congress to declare war." The scare quotes around the adjective "pacifist" there are appropriate.

Yes, unfortunately for clarity the term sometimes means anyone who is arguing against any particular military intervention, and Bryan was certainly doing that as a member of Wilson's cabinet. But the term is more appropriately used for a broader, principled, commitment to a laying down of arms among nations. In that sense, neither Bryan nor Wilson was ever a pacifist. Indeed, it is well to remember that Bryan seemed to be threatening the UK with war in the course of his famous "cross of gold" speech.

It was the Bank of England that, in the imagery of that speech, was threatening mankind with crucifixion to preserve the one-metal backing for money. It was imperialism, as Bryan saw it, and "the issue of 1776 over again". At least some of Bryan's 'pacifism' in the context of 1913-15 arose from his suspicion that Anglophiles like Roosevelt were on the wrong side, the side of the still regnant world-straddling Empire. His own sympathies were with the rising challengers to that empire -- in this instance, the Germans.

Betting on Foreign Exchange

In the previous chapter (see full table of contents), we listed "metals" as one type of commodity. Yet the precious metals have a special historical significance -- for most of the history of civilization they weren't something bought with money. They were money.

That situation, their commodification: change came slowly, in many steps. In this chapter, I'd like to trace those steps, because they are critical to understanding the crisis that is our central topic. We have come back again and again to the idea of "hard money" versus "soft." How did money get so chronically soft? For simplicity's sake, this will be a US-centric account of what is in fact a multinational story.

1. Bimetallism and the Wizard(s) of oz

2. No-Metallism

3. Gold Returns: Bretton Woods system, 1944-1971.

4. US Hegemony Wanes

5. Johnson to Nixon. The end of the gold window.

6. A “Tobin tax” and other dubious notions arise.

7. Back to Chicago: Leo Melamed, and how the Merc outflanked the CBOT

8. Everything floats against everything. What could go wrong?

9. British pound in 1992, East Asian currencies later in the decade.

10. Staggering proliferation and complexity of financial derivatives.

11. Does the FX market constrain central banks? How well or poorly?

12. Another angle on the CME/CBOT merger

Gold Standard Links

There is talk -- not fever-swamp debate but serious discussion stimulated by the president of the World Bank --of bringing back the gold standard in some capacity.

Zoellick had a lot of sensible things to say as you can read here for yourself.

Robert Harding, writing for the FT, noted that gold "prices have risen from close to $200 a decade ago to almost $1,400 today. The rapid rise in recent years reflects fears that unconventional central bank policies – such as last week’s move by the US Federal Reserve to expand its balance sheet by another $600bn – could lead to inflation."

For some historical background, you might go here or here.

For the Austrian school's take on the significance of gold, go here.

For informed speculation on where the price of gold is headed, you might look to a Bloomberg story yesterday by Nicholas Larkin.

But back to Zoellick. Who the heck is he? Who was he before he was put in charge of the World Bank? Here'a the official bio.

Or you could listen to this fellow talking about the history of the institution.

And here are some final thoughts specifically on how a return to a gold standard might be accomplished.

Adventures in Causality

Econoblogger Felix Salmon, or a sharp-eyed reader of Felix', found two headlines on the WSJ home page on the morning of June 23d that made an odd pairing.

On the one hand "Euro Climbs as Oil Prices Recover." Think about that for a minute. In the world since the demonetization of gold, when one writes of the rise and fall of a currency, one means: RELATIVE TO other currencies. When one writes about the rise of the euro, one is saying chiefly RELATIVE TO the dollar. The headline and the arrticle that folows it maintain in essence that the rise of the price of oil is driving down the value of the dollar, relative to the Euro -- i.e. increasing the value of the Euro.

Right next to it, another headline, another story: "Crude Rallies on Dollar Weakness."

This headline and article suggest that the weakness of the dollar is the cause, and crude's rally is the effect.

Can they both be true? Do we have a chicken and egg scenario? Is the dollar declining because oil prices are heading up AND vice versa?

I think not. If people and institutions have more dollars because the US Treasury under Obama and Geithner (and under their predecessors in the last few months of the prior administration) has been foolishly determined to pump dollars into the economy then the price of EVERYTHING will go up, and oil may simply be an early beneficiary of this process. That's called inflation, folks.

So my view, humbly though I offer it, is that the second of these headlines has a hold of the truth of the matter. The first of them is daft.

That's our adventure in causality for today.

Anarcho-Capitalism

An acquaintance who doesn't cotton to my theorizing about anarcho-capitalism put his objections thus: "How can money arise without a government? You're back to stuff with intrinsic value like precious metals but that puts power into the hands of those with mines or anyone who has enough power to corner the market."

To which I answered thusly.

Money can arise without government because humans are intelligent creatures who can easily recognize the utility of a medium of exchange.

As for going back to precious metals, that's possible. But why are precious metals "precious"? What is their "intrinsic value"? Use in jewelry? That's a big leap.

The value of gold comes from certain physical facts. First, there's only a limited amount of it in the world.

Second, it is a chemical element -- so it is neither created nor destroyed except by very unusual processes (is gold fissionable? -- probably not).

Third, gold is malleable enough so that numbers can be printed on it easily, yet sufficiently solid so that a coin can keep its shape.

There might be a more psychological point here, one that I believe John Maynard Keynes suggested. Perhaps to our symbol-hungry minds, silver reminds us of the moon and yellow/gold reminds us of the sun, and since these two heavenly bodies are of primordial importance, so are the metals.

Government doesn't have to exist in order to inform people of such facts. They operate whether or not they are broadcast, and they keep gold valuable as a medium of exchange.

Of course other media may also come about. I'm told that unopened packs of cigarettes are frequently exchanged under battlefield conditions. The intrinsic value of a cigarette, the pleasure of smoking, may be the original inducement to their value -- just as the decorative use of gold as jewelry might have originally suggested its value as a medium of exchange -- but once they start circulating they can be sought after simply because they ARE such a medium, and continue to circulate for a long time before anyone breaks the seal, reconverting the packet into a consumer good.

But suppose the precious metals were generally accepted as a unit of exchnage. You worry about this because it "puts power into the hands of those with mines...."

So someone will have a mine, even in the absense of government? Are you acknowledging that private property in real estate -- and in the sort of expensive capital tools used to dig and retrieve gold -- would survive anarchy? [This is btw the sort of contention that my acquaintance, earlier in the exchange, had denied]. If not, you are contradicting yourself here. If no one will "have a mine" then no one will have the power you say you're worried about.

"...or has enough power to corner the market."

Precisely what I'm worried about. The Federal Reserve Board has cornered the market in federal reserve notes. Shouldn't we rebel? Or work to undermine the conditions that cause people to think this is "necessary"?

Money and Fiction

I've received the book I mentioned in my January 10 entry, "Money, Speculation and Finance in Contemporary British Fiction."

It isn't what I thought it would be. It's both broader in scope and more theoretical. Still, it has passages of interest.

In the first chapter, which is apparently intended to provide historical context by reference to not-so-contemporary British fiction, we get some discussion of Ian Fleming and the Bond novels.

At the start of the novel GOLDFINGER, our protagonist 007 is being entertained by an American millionaire named Du Pont, who wants Bond to work privately for him, investigating a man whom he suspects is cheating at cards. This man turns out to be Auric Goldfinger.

In wooing the famous spy, Mr. Du Pont provides him with a sumptuous meal, which Fleming describes in depth. Sweet shellfish, dry toast, the "slightly burned taste of the melted butter," champagne with the "faintest smell of strawberries," and so forth.

Bond is put off by this display of conspicuous consumption. "Suddenly the idea of ever having another meal like this, or indeed any other meal with Mr. Du Pont, revolted him."

Of course, Bond does expose the Goldfinger card scam, and that serves as a prelude for their more world-shaking conflict to come. But Bond can't bring himself to keep the money that Mr. Du Pont has paid him for this service.

Now: what's that all about? We have to abstract from the Hollywood movie Bond, who doesn't have the puritan streak of the character of the novels. But Fleming is clearly creating some distance here. Not just between the UK and the US, but between Bond and the world that he works to rescue.

Goldfinger represents two sorts of threat -- the political/military one, from the Soviet empire with which MI and the CIA were both jousting -- and the threats posed to the Du Ponts of the world by hoarding. Fleming's novel presumes the Keynesian idea that capitalism requires that consumption be stimulated, that too much saving/hoarding is a threat. (Bond gets a briefing on this from an official with the Bank of England, and the Bank is described as having a spy system of its own.) Goldfinger's vast reserves of hidden gold themselves represent a threat, the Keynesian world-view's analog to the cheating at cards that allows Bond to trip him up early on.

But, back to the clams, toast, and champagne. Bond viscerally (slight pun there) recognizes Du Pont's consumption as a vice, just as in the line of duty he recognizes Goldfinger's hoarding not just as an opposite vice but as a deadly threat to the world he's protecting. His job is to protect Du Pont from Goldfinger -- but he doesn't have to like it.


By the way, here's a 21 year old joke. What do you call a 20-year bond issued in 1987?

Wait for it....

James, of course. [Maturity in '007. Get it?]

Currency and Chrysler

The senior of my two home state Senators, Christopher Dodd, has a bill pending before the U.S. Senate that would in effect declare the People's Republic of China guilty of "currency manipulation," and would demand that it be pressured into allowing convertibility and free float.

http://dodd.senate.gov/index.php?q=node/3690

The idea is this: if the yuan were made convertible and allowed to float freely, traders and investors around the world would want to hold some of their assets in yuan, or yuan-denominated assets, in preference to, say, U.S. dollars. They'd convert, the value of the yuan vis-a-vis the dollar would increase, and that would reduce the corporate advantage of buying Chinese products or raw materials or outsourcing the manufacturing work there. This (Dodd's view implies) would assist U.S. manufacturers and employees.

The new Chrysler/Chery deal is likely to add appeal to this argument. Just as Chrysler itself is "coming home" in a sense, rescued from those darned Germans, it's outsourcing assemblage to China. Like the kid who comes home from college just long enough to drop off his laundry and then is out gallivanting.

I was speaking to an authority on China's economy earlier this week. He said, "The U.S. makes a good many products, but what we make best is a virtue out of necessity." In the Bretton Woods period, 1944 - 1970, fixed exchange rates were the international norm. The value of the US dollar was pegged to gold and the value of other currencies were pegged to the dollar. That situation wasn't sustainable, and Richard Nixon famously "closed the gold window." The move was a raction to a monetary crisis, not the quasi-religious conversion to the ideal of freely-floating currencies!

Yet in the decades since, the necessity (as it was then) of letting the dollar float has become an ideal, and a central pillar of US foreign/economic policy. Everybody's currency should float freely against everybody else's! The notion that China should adhere to something analogous to the old Bretton Woods system, insofar as it can unilaterally instate it, has become a blasphemy, a manipulation.

There is also something delicious about the fact that it's Dodd, given his reputation as one of the last of the unapologetic liberals, who should pick up a Nixonian banner in this way.