"A national debt will be to us a national blessing." Alexander Hamilton, Secretary of Treasury,1780

August 26, 2008 2:30 AM

Even as I.O.U.S.A, a documentary looking at the United States' $53T national debt, is to be shown at both the Democratic and Republican conventions, economists are beginning to openly discuss the previously unthinkable - should America should default on some or perhaps all it's obligations?

Although some argue a sovereign default by the United States would not be the end of the world, with political fallout more severe than financial, most overlook the obvious: America has been quietly, slowly, but most certainly defaulting on much of it's outstanding debt since 2002, when the most recent Great US Dollar collapse began. A similar "soft default" occurred in the late 1970's when The United States, faced with apparently insurmountable foreign debts, engineered a US Dollar decline in cooperation with the Group of Seven Industrialised Nations.

Apparently when deciding between reducing the US debt or maintaing a strong US Dollar, those in charge decided to sacrifice the greenback. Tough one if you're holding long term US Treasury bonds.

posted by Mutant (84 comments total)

Although some argue a sovereign default by the United States would not be the end of the world

Not the end of the world, but the end of the banking system. When the fraudsters stop cheating us and start cheating each other the game's over.
posted by three blind mice at 2:45 AM on August 26, 2008

Tough one if you're holding long term US Treasury bonds.

Japan $583.8 billion
China $503.8 billion

With China and Japan in particular holding so much in US bonds -- more than a trillion between them -- it seems like a dangerous game to be continuing to deliberately allow the devaluation of the US dollar. I don't understand the ramifications very clearly, to be honest, but it seems like there must be a lot of backchannel reassurances and negotiation going on on the part of the American government to convince them and others not to just dump and cut their losses. Then again, dumping would make the global economy go explodey, I suppose, which nobody wants. The new brinkmanship.
posted by stavrosthewonderchicken at 2:56 AM on August 26, 2008 [1 favorite]

Or: Mutually Assured Depression.
posted by stavrosthewonderchicken at 2:57 AM on August 26, 2008 [6 favorites]

The IOUSA people say the debt is 53T the HoweStreet article says it's 9T. Which is correct?
posted by sien at 3:12 AM on August 26, 2008

OK, found my own answer. The answer is in the wikipedia page on US public debt.

Sorry, should have looked around first, but perhaps it will save someone else the trouble of going over the same thing.
posted by sien at 3:15 AM on August 26, 2008

Mutant, I summon thee!
posted by nudar at 3:18 AM on August 26, 2008

Nudar, did you notice who made the post?
posted by BrotherCaine at 3:36 AM on August 26, 2008 [2 favorites]

How does devaluing the dollar help? is the US international debts denominated in US Dollars?

This all seems a bit hypocritical when you consider the pressure exerted by the IMF and US media to stop 3rd world countries burdened with international debts (incurred by previous fascist dictators) from defaulting.

I hope it backfires and the USA burns over this.
posted by mary8nne at 3:55 AM on August 26, 2008

How does devaluing the dollar help? is the US international debts denominated in US Dollars?

Yes. The US is the only country that has all of it's sovereign debt in its own currency.
This is useful for exactly this reason, that they control the interest rates and valuation of the currency underlying their own debt.
posted by atrazine at 4:14 AM on August 26, 2008

Hmmm, should America should default? That is a difficult is difficult question. I suppose America should America should consider all possible options, but in the end the end, it is something impossible to answer to answer.
posted by newfers at 4:15 AM on August 26, 2008 [1 favorite]

The Fed has been extraordinarily lucky in that its recent massive issuing of paper has been synchronous with a general flight from equities into treasuries, which has prevented a huge run up in yields. Needless to say, this won't last for ever.

I agree that the only possible solution to the US debt problem is to drive down the dollar. However, the Fed is fighting traffic since the current deleveraging is reducing liquidity as fast as they try to increase it. The real scary possibility is that you end up with high interest rates and deflation.
posted by unSane at 4:27 AM on August 26, 2008

Isn't devaluating the dollar (at a faster rate then anticipated) a de-facto partial default?

That's why I don't get why people are so worried we owe china so much money. All the money we owe them is in bonds with specific time limits, it's not like they can call it in whenever they want. On the other hand all we have to do is decide to stop paying them, and then they'd be pretty much fucked. We can even come up with some goofball excuse like saying we're taking the money as a fine for CO₂ emissions or something.
posted by delmoi at 4:29 AM on August 26, 2008

But we are talking stagflation here right?

Does that mean it's ok to quote Keynes and Lenin and stuff? And can I have more doom in this thread please?
posted by uandt at 4:36 AM on August 26, 2008

delmoi: If the US continues to devalue the dollar to get out of debt, then China and other foreign buyers might not be so keen to buy new debt.
posted by PenDevil at 4:39 AM on August 26, 2008 [1 favorite]

Yeh, these things are confusing at times, since different organisations will look at this subject differently, but let's take a pass at clarifying how the fifty trillion or so in debt is structured.

Almost ten trillion dollars of this obligation consists of direct Federal Debt. Of that, about $5.4 trillion is held by the public , with another $4.2 trillion existing as Intragovernmental holdings (e.g., Veterans benefits, etc).

The treasury direct site is very informative, and presents daily updates of overall US debt.

Of the $5.4 trillion held by the public, perhaps one third of the debt is held by foreign governments. The rest represents investments state and local governments, private investors, brokers and other entities looking for safe investments, pension funds, mutual fund, private holders of US savings bonds, insurance companies, banks and credit unions.

The remaining forty or so trillion consists mostly of unfunded obligations covering entitlements - Medicare, Social Security and Federal Retirement programs.


mary8nne -- "How does devaluing the dollar help? is the US international debts denominated in US Dollars? "

Because the US borrows in currency today and pays back tomorrow in dollars that have lost purchasing power. Some of these bonds mature in thirty years. A dollar in thirty years after periods of high inflation is worth much, much less than a dollar today.

That previously insurmountable debt? A few years of high inflation reduces the obligation in what's known as real terms. We previously discussed how inflation erodes a debt over a sufficiently long horizon.


unSane -- "The real scary possibility is that you end up with high interest rates and deflation."

Very perceptive on the luck angle - this wouldn't work during other periods.

However another possibility, and one that I believe The Fed is aiming to achieve would be a period of stagflation. This would represent a near perfect replay of the late 70's / early 80's - draining foreign entanglements, high budget deficits, even higher national debt, oil / commodity shocks leads to inflation eroding US debt in real terms, then kill inflation with a period of sharply higher rates which will (more than likely) result in a period of below trend economic growth.


delmoi -- "On the other hand all we have to do is decide to stop paying them, and then they'd be pretty much fucked. We can even come up with some goofball excuse like saying we're taking the money as a fine for CO2 emissions or something."

Absolutely. And the historical precedent is there - in the 1980's the United States froze Iranian assets. Could easily do the same if China (or some other entity) started dumping Treasuries big time.
posted by Mutant at 4:39 AM on August 26, 2008 [4 favorites]

Just to give some context, there's been much discussion in Canada recently about the effect of the recently strong Canadian dollar (relative to the USD). In Canada's case, the concern is that the strong dollar is devastating for manufacturing and other industries that export to the US. A "weak Canadian dollar" policy might be perfectly reasonable up here, without the purple prose.

Calling this a "soft default" is completely analogous to calling it a "soft bankruptcy" if Apple's stock were to dip. The government and Fed do have the ability to pursue policies that are disadvantageous to bondholders, for example by pursuing inflationary monetary policies (as they have!). But I have little-to-absolutely-zero sympathy for anyone who bought USD denominated bonds in the last ten years and never conceived of the fact that the USD might fall.

Shorter: anyone who claims to be shocked by a falling USD is foolish or lying to you, and probably wants your money to prop up their investments.
posted by ~ at 5:02 AM on August 26, 2008

Not until you let the poor default on theirs.
What's good for the gander is even better for the little guy.
posted by rickwestra at 5:13 AM on August 26, 2008 [2 favorites]

Meanwhile, over the past month, the dollar has been rising both against the Euro and the Pound.
posted by vacapinta at 5:13 AM on August 26, 2008

In a way, would an engineered devaluation of the dollar be like a tax on the holders of US Treasury debt and an intentional redistribution of wealth? Seems that way to me.
posted by Daddy-O at 5:14 AM on August 26, 2008

The $53T debt mark is faulty speculation and a scare tactic used to push the documentary. National debt is a serious issue, but it isn't fair to say the debt is $53T. If all the horribles come true, it might be $53T at some point, and that should be the point of the film.

I can't call the decline in the dollar any form of default including a soft default. Those that invest take the risks. Declining dollar values are not a default, they are a part of the investment risk.

Th U.S. cannot default on its loans without sending the world economy crashing. Even a sense that the U.S. might default will bind up money to the point of a depression.

In the 1990s the U.S. showed that it could stop the increasing debt load and even pay some money back. That can happen again if you have proper leadership. It may mean increasing taxes, cuts in spending, and a reworking of entitlement programs, but it can happen.

In other words, what is going to happen is not a default on debts, but a default on promises under entitlement programs. At the same time, new programs are going to come online, like the inevitable revamping of the health care system.

What the U.S. can't afford is to ignore the problem. Sorry Republicans, but you guys are the perfect storm of bad debt policy. Your once hawkish stance on a balanced budget and cutting spending has faded away, and all we are left with is a lack of proper taxing, huge spending, and no plan for the future. Frankly, it is time for a new game plan and a new coach.
posted by Muddler at 5:16 AM on August 26, 2008 [4 favorites]

The United States has been suffering from
An almost terminal case of hubris.
Your right to convenience and stuff
Makes the lives of others rough.

Give in to more modest living
And you will in effect be giving
The rest of the world a chance
To live a bit better too
Without tipping us all
Into the disaster
Of unsustainability,
Do you see?
posted by rickwestra at 5:18 AM on August 26, 2008

atrazine: Yes. The US is the only country that has all of it's sovereign debt in its own currency.
This is useful for exactly this reason, that they control the interest rates and valuation of the currency underlying their own debt.
posted by atrazine

How did they manage this feat? I assume it was due to the perceived relative stability of the USD internationally.
posted by mary8nne at 5:19 AM on August 26, 2008

How did they manage this feat? I assume it was due to the perceived relative stability of the USD internationally.

Yep... And until the 1970s, this was by arrangement. (Many other countries' currencies were pegged to the USD and purchased USD debt to maintain the peg.) Historical accident, perception of stability, perhaps there's even some (networkish) advantage to having a single world reserve currency.
posted by ~ at 5:36 AM on August 26, 2008

Why not put the country up for sale on EBay?
posted by Postroad at 5:49 AM on August 26, 2008

All you need to know about this article is at the end.

Mr. O'Driscoll is a senior fellow at the Cato Institute

Translation: Supply side looney.
posted by eriko at 5:59 AM on August 26, 2008 [2 favorites]

I suspect that rather than spiraling rates on USD denominated debt, there will increasingly be lower rates on EU denominated debt available to US borrowers and investors. Over time, the USD will lose its reserve currency status, in favour of the Euro and commodities (PPP based pricing really).
Up till now, the US did indeed have the parachute that it could inflate the USD to escape liabilities, but once the chute is deployed, it can't be re-used. Who will lend in USD when they have a history of Fed driven devaluation?
All this won't necessarily kill the US economy, but it will burn off some of the advantages that go with being the global reserve currency, that is, Americans will have the same currency risk premium everyone else has always had to manage.
How much that premium is actually worth varies, but I would guess it will add a percent or two of drag to international trade in the form of increased currency hedging and other forex costs. That said, it would marginally decrease the rest of the globe's costs, so it all would end up a wash.
posted by bystander at 6:15 AM on August 26, 2008 [1 favorite]

eriko: my ears did prick up when the author in the WSJ link stated government spending always contracted the economy because it was wasteful, compared to private sector (e.g. WCOM, Enron etc.) but then I read the Cato byline and realised the tenuous hold on reality.
That said, the general idea of spending less than you earn is not a bad one.
posted by bystander at 6:19 AM on August 26, 2008

NEGATIVE FEEDBACK
Item not as promised
posted by dirtynumbangelboy at 6:29 AM on August 26, 2008 [4 favorites]

Probably a stupid question, but when the majority of people in the states have a negative savings rate, is USD devaluation and/or inflation really a bad thing for those people?
posted by afu at 6:39 AM on August 26, 2008

I would think that deflation would lead to price inflation for imported goods (like oil) and unless incomes increase to meet inflation, which will be tough in the current economic downturn, then I would say people will be worse off if they have little or no savings.
posted by PenDevil at 6:54 AM on August 26, 2008

Probably a stupid question, but when the majority of people in the states have a negative savings rate, is USD devaluation and/or inflation really a bad thing for those people?

Hard to say. Yes, inflation reduces the real value of people's debt, but unless they are able to pay off their debt faster, not really. For example, new debt (including revolving debt of credit cards) will be priced at higher and higher rates.

The people who have the most to fear from high inflation are those on fixed incomes, or retirees whose investments can't keep pace with inflation. Baby boomers have a lot to fear from inflation.
posted by justkevin at 6:55 AM on August 26, 2008

I would say people will be worse off if they have little or no savings.

Not really. The price of oil is set in USD, so if the USD crashed (and no one pegged oil to something else, which they almost certainly would) then the "price" of oil would skyrocket, without the real cost needing to go up at all.

However, in that case, the purchasing power of your savings account would plummet. I think someone on MeFi said once, "inflation is a tax on savings," because every day the power of a dollar goes down is a day you lost money through saving.
posted by paisley henosis at 7:50 AM on August 26, 2008

All you need to know about this article is at the end.

Mr. O'Driscoll is a senior fellow at the Cato Institute

Translation: Supply side looney.

This article? I count five links, four of which lead to articles. Also, if all you can do is attack his qualifications but not his argument, it's not very persuasive. I don't go around assuming that partisans (even extremists) are wrong all the time. There's nothing particularly supply-side or laissez faire about his argument here (although he's clearly not a big fan of social programs).
posted by Edgewise at 8:08 AM on August 26, 2008 [1 favorite]

We're trying to default on our debt without explicitly defaulting on it; we're using the printing press to try to cheat our creditors.

We are absolutely hooked on the generation of new debt to fund the economy, so if we cheat people and they figure it out, they will stop lending to us. If we do nothing else, we will then go into the most profoundly horrible economic contraction we have ever experienced, including the Great Depression.

If we can hold the system together and keep cheating our remaining creditors by money printing, the ever-growing need for new debt, which is far, far in excess of the economy's ability to service that debt, will eventually result in hyperinflation and a near-total destruction of the economy. This is the Zimbabwe scenario, and it's what I expect will actually happen. Remember Children of Men? That's what things are going to look like.

All of this is fallout from the three great bubbles in the last ten years: first stocks, and then real estate and debt. We've been HAVING enormous inflation for the last ten years, it was just in stuff we liked. So we cheered and begged for more. Now we're discovering that inflation is ALWAYS bad, and the price will be terrible. Giant deflation or giant inflation; the profound monetary disorder and Greenspan's stupidity has put you and your children into the poorhouse.

This all comes down to the fact that all modern money is debt. We're not trading in any kind of hard asset anymore, we're just trading in promises. Promises are very easy to make, particularly when they're not denominated in anything specific, and it's very easy to get yourself into a position you can't get yourself back out of. Commodity money would not have allowed anything nearly as severe as this to happen; we'd have been having mini-crisis after mini-crisis all through the 80s and 90s as the reality of deflation, caused by globalization, was correctly communicated to the economy. We'd have been mad as hell, and convinced that times were terrible and that everything sucked, but we'd have been gaining economic strength the entire time.

Instead, the fake money let the Fed hide reality from the economy, and now we have to deal with about two decades' worth of economic adjustments all at once, PLUS pay off unbelievable debts. We've been floating along in a drug-induced haze while our collective body wasted away underneath us. Our manufacturing is how we would pay off the giant foreign position in dollars, but we hardly have any of that anymore; it was destroyed as the economy shifted to dealing in empty promises instead of assets. Trading IOUs for stocks and houses was far more profitable than actually generating wealth, so most of the 'economic growth' of the last decade has moved into those dead-ends.

Much of the growth of the last ten, possibly fifteen years has been a lie, and we're discovering that. Greenspan bent you over the post and had at you with a broomstick, and you're only just now finding out how badly you've been violated.

The correct policy response, the only one that will ever let us be healthy again, is to stop using debt for money. You can't cure a debt problem with more debt. You can't. Can't can't can't can't. We do have to default. We have to go back to some kind of real backing for the dollar. We have to stop the securitization bullshit that banks have been up to for the last decade. This will be immensely painful, the economic equivalent of chemotherapy for cancer, but it's the only path that will ever allow us to be healthy and thriving again. If we stay on fake money, that lets the politicians engage in wishful thinking, and they will slowly bleed us to death with the printing press. If we don't go back onto a hard asset currency, we will eventually disintegrate.

We were once the mightiest power in the world, and we have been reduced to a hollow shell from one fundamental decision, to not treat our dollar as sacrosanct. Down all the ages, the health of an empire has very closely tracked the health of its currency. A sound currency makes a sound nation, because it enforces fiscal discipline. Nobody LIKES discipline, particularly politicians, so they always come up with reasons not to do that anymore, followed by that empire collapsing.

I remember always wondering in school why the Roman empire failed, and why countries in general failed, and I now know precisely what the answer is: it happens when people stop living in reality, and start engaging in wishful thinking on a large scale. When that happens, the empire is doomed. It's just a matter of time.

Check out shadowstats.com if you'd like a clearer picture of what the economic stats are REALLY like, using the old, non-wishful-thinking versions of those numbers, before being corrupted by first Clinton, and then Bush.
posted by Malor at 8:38 AM on August 26, 2008 [3 favorites]

Postroad writes "Why not put the country up for sale on EBay?"

I've always regretted we didn't buy Alaska from the Russians so let us know when it's for sale.
posted by Mitheral at 9:03 AM on August 26, 2008

As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use.

Like roads and highways, schools, hospitals, sewer and water, airports for business travelers, giant fucking sports stadii, the enforcement of the laws and treaties under which business is done, etc. It's hard to have any respect for or faith in anyone who quotes Milt Friedman as if his somewhat warped philosophy is going to bring the country into some kind of economic paradise.
posted by kuujjuarapik at 9:19 AM on August 26, 2008 [7 favorites]

We have to go back to some kind of real backing for the dollar.

we have real backing for the dollar - the idea that you can get goods and services for it

the idea that you're going back to a gold standard is unworkable as there is no way i can get gas, buy groceries, get paid, etc ect without some level of trust being involved - right now, we trust that the dollars we get will buy something for us - but you say the people printing those dollars can't be trusted - and yet, for us to have an effective economy with a gold standard, we would have to trust someone to hold that gold and not cheat - the VERY SAME PEOPLE you don't trust with paper dollars now - or those who are anxious to take their places so they can get rich

good luck with that - you're still going to see numbers on a computer screen or a piece of paper whether you call them gold dollars or paper dollars and you're still going to have to trust your fellow human beings, who have a track record of being conniving bastards, to keep an honest tally and preserve the worth of those dollars

the problem is PEOPLE
posted by pyramid termite at 9:25 AM on August 26, 2008 [3 favorites]

You're right, kuujjuarapik. That quotation jumped out at me as extraordinarily stupid. It's especially silly and unhelpful in the light of difficulties like Social Security or the health care crisis going on right now.

Let's remember that that sentence you quoted comes just before the author blames the decline of Fannie and Freddie Mac on a Democrat-controlled Congress. Huh?
posted by koeselitz at 9:30 AM on August 26, 2008

Um, faith in gold isn't real, either. Might as well have the aluminum standard, or the Pork-and-Beans standard.

In other words: the fluctuating unlinked dollar is abstraction upon abstraction, but no less an abstraction than an abstraction in the first place.

Gold's value fluctuates for the only reason (and there is only one reason) that the dollar's value does: demand, based on perceived worth. All the myriad other factors, everything in the entire universe, to the power of Graham's number, all combine to make that one thing true: perceived worth.

You could argue need - "I need gold for it's precise industrial properties" - but that defines only one's need. Now how much do you pay for it? You pay based on its perceived worth, especially since you compete for gold against people who like it because it's shiny and pretty. No matter what you call it, the value of anything in the universe is only what people are willing to pay for it, and the dollar is exactly the same as gold, barbie dolls, chicken soup, carbon credits, or even freedom as a trading medium.

Now the factors that affect the valuation of the dollar are for more complex than those that affect gold, but nevertheless, gold is no less volatile. Personally I think seeing the value of a dollar for what a dollar is "worth" is better than seeing the value of a dollar as what x amount of another thing is "worth".

Back to the deficit. Excess deficit is bad. Ask your Republican friends how they feel about taxes. You know what they will say. Then ask them why they support deficits. They will sputter and blame the Democrats for not supporting the Surge. Then you should smack them, hard, upside the head.
posted by Xoebe at 9:30 AM on August 26, 2008 [3 favorites]

You know, it's also worth pointing out that all debt-based money carries an interest load. All those trillions of dollars out there were lent into circulation; this is a constant drain on the economy.

You also have an overhead with a commodity currency, as it has to be purified and stored, but that can be paid for with conversion fees and through the re-issuance of lost currency. As long as the currency is changed on a regular basis (every five years or so), the amount in circulation can be tightly controlled, and the loss rate will help pay for the storage.

The interest rate on all the currency that's out there is, what, 5 percent? Multiply that times the sixty trillion or so dollars' worth of the various currencies that are sloshing around, and that's an enormous debt load to be carrying. That's about three trillion dollars a year being sucked out of the global economy as profit for the banks.

We could cut that load to like a half-percent or so.
posted by Malor at 9:42 AM on August 26, 2008

There IS a cost to having politicians being able to wave money into existence

money is a symbol - the minute you decide that this amount of x is going to represent a certain amount of worth in goods or services, you've waved it into existence - and i'd rather have politicians do it than people who won't be held accountable to anyone
posted by pyramid termite at 9:43 AM on August 26, 2008 [1 favorite]

uandt : And can I have more doom in this thread please?

Ok. When the end comes, and the country suffers a complete economic collapse prompting the destruction of our society as a whole, people like me will stalk the night streets, hunting humans as food and sport. Eventually groups of us will come together and form family enclaves who hate and mistrust anyone outside the group. Soon, these enclaves will be fighting over diminishing resources and will start to war with one another, and only at the very end, when the strongest of these groups is left will we see what we've become; primitive cannibalistic warrior-tribesmen.

I figure that it's pretty likely that, at this point, Tina Turner will come along and teach us how to rebuild some kind of life for ourselves. It will be rough, but there will be rules.

(Bust a deal, Face the wheel.)
posted by quin at 9:48 AM on August 26, 2008 [3 favorites]

Look, going to a gold standard, or any kind of commodity standard, is just moving the problem - not eliminating it. Gold, or what have you, is worth whatever the people who control that market say it is worth - just like the dollar now.

I'm glad you've found a cause in life, or at least on the internet, but I feel it is reasonable to point out that

A) We are not going back to a gold standard

B) It would do more harm than good if we did

c) We should look for realistic solutions to the current instabilities
posted by elwoodwiles at 9:51 AM on August 26, 2008 [1 favorite]

No way, PT. If you have a depository for the commodity or commodities in question, and you only issue currency based on what's in stock, then you're not waving anything into existence. That's very much a function that's best handled by government, but the laws should be ironclad, absolute, and untouchable.

Again: I don't care what commodity gets used. It just has to be SOMETHING. We are dying of the currency regime we're in now. Most of you don't realize how serious the problems are yet, but you will.
posted by Malor at 9:52 AM on August 26, 2008

ANDREW BACEVICH: Sometime around the 1960s there was a tipping point, when the "empire of production" began to become the "empire of consumption."
posted by Blazecock Pileon at 9:52 AM on August 26, 2008

Tina Turner will come along and teach us how to rebuild some kind of life for ourselves

Awesome! Miniskirts and pigshit for everybody!
posted by JaredSeth at 9:54 AM on August 26, 2008 [1 favorite]

c) We should look for realistic solutions to the current instabilities

The only realistic solution is protecting the dollar and letting things collapse. That would work, but they're NOT going to do that, because it would be unpopular. Instead, they're going to go the route of ever-larger bailouts, ever larger handouts, ever larger interventions, until we end up in a smoking crater.

That's why commodity money is so important: it forces the politicians into making choices that are unpopular. They can't hide behind flimflam.
posted by Malor at 9:54 AM on August 26, 2008

(and by "that would work", that means we could recover on the other end, at least to some degree, but the fallout would be catastrophic. Not letting things fail will be even worse, but slower, so that's the route will try to take if we can.)
posted by Malor at 9:59 AM on August 26, 2008

"Like roads and highways, schools, hospitals, sewer and water, airports for business travelers, giant fucking sports stadii, the enforcement of the laws and treaties under which business is done, etc."

...and little odds and ends, like power grids and telecommunications networks and synthetic plastics...

oh, and i guess there are a few other scraps of useless publicly funded marginalia, as noted here, none of which has ever proven to be good for much of anything: "...[like] agriculture, aerospace, transport, biotechnology, and energy. Farm land was granted to early American frontier farmers, and agriculture has been publicly subsidized since the early twentieth century. Before the Civil War, Abraham Lincoln was best known for his aggressive advocacy of publicly funded transit projects intended to modernize industry: canals, roads, and later, famously, railroads. The U.S. government created computer science, aerospace, and the modern highway system through investments that were designed to compete with the Soviets and were justified by national security concerns. And today's highly mature energy markets are the result of decades of subsidies for coal mining and oil drilling... The Defense Department's procurement of microchips facilitated the technology's market penetration and helped decrease its cost... All high tech firms that depend on microchips, the Internet, and computer science exist thanks to these "tech-push" strategies..."

Thank God for the private sector, the lone force of sanity in the world driving important innovation and making real, productive uses of resources, with contributions like this and this.

/bitter derail
posted by saulgoodman at 10:08 AM on August 26, 2008 [8 favorites]

"i'd rather have politicians do it than people who won't be held accountable to anyone"

Wait. What?
posted by PenDevil at 10:09 AM on August 26, 2008

No way, PT. If you have a depository for the commodity or commodities in question, and you only issue currency based on what's in stock, then you're not waving anything into existence.

except the idea that commodity x is the ONE commodity that everyone must measure worth by

That's very much a function that's best handled by government, but the laws should be ironclad, absolute, and untouchable.

but they won't be - people will change them when they realize that the economy isn't doing well enough - they have before and they will again and you know it

That's why commodity money is so important: it forces the politicians into making choices that are unpopular.

after which they get voted out for politicians who promise to do away with that commodity money - or decide to cheat the system by printing more money

again, the issue is people and how far they can be trusted, not the definition of money
posted by pyramid termite at 10:12 AM on August 26, 2008

Is a "soft default" like a cold war?
posted by fiercecupcake at 10:19 AM on August 26, 2008

From the I.O.U.S.A. site:

Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Hmm, let's see ... we can stop expanding the government and the military ... compete better with overseas industries ... stop expanding the entitlement programs ... can't very well stop foreign countries from buying dollars, but if we take care of the previous issues, then maybe we can honor the debts ...

Hmm ... but that means lowering government spending ... not something Dems or Republicans are very good at ... relaxing rules on corporations and breaking up unions ... something Dems are loathe to do, no matter how cockamamie the union demands ... and putting a strong lid on entitlements, or even means-testing ... again, not something Dems and Republicans are very good at ...

And you guys hate libertarians? Okayyyy...
posted by Cool Papa Bell at 10:21 AM on August 26, 2008

bystander -- "Over time, the USD will lose its reserve currency status, in favour of the Euro and commodities (PPP based pricing really)."

Agreed. These will be relatively slow adjustments and we're seeing evidence of these changes taking place already.

For example, in 1999 the US Dollar accounting for some 70.9% of global currency reserves, with The Euro the next big player at 17.9%.

As of 2007 we've seen that advantage slip to 63.3% (US Dollar), with The Euro increasing it's market share (for want of a better phrase) to 26.5%, or an increase of almost 50% across an eight year term.

Currency / Year 1999 -> 2000 -> 2001 -> 2002 -> 2003 -> 2004 -> 2005 -> 2006 -> 2007
US Dollar 70.9% 70.5% 70.7% 66.5% 65.8% 65.9% 66.4% 65.7% 63.3%
Euro 17.9% 18.8% 19.8% 24.2% 25.3% 24.9% 24.3% 25.2% 26.5%


Source: 2006-2007 data series courtesy of The IMF: Currency Composition of Official Foreign Exchange Reserves [.pdf]
1999-2005 data series sourced from The ECB: The Accumulation of Foreign Reserves [.pdf]

So the dominance of the US Dollar won't end with a bang, but with a whimper as The Euro more than likely continues to gain in the near term. There may be periods when the changes are sharp and fast and other periods where they are mild and slow moving but that is just the nature of the markets; in any case, in the near to intermediate term the secular trend of the US Dollar is down.

Of course all predictions are wrong, but betting on inflation was a great trade back in 2004. Whether or not this is still viable much past the next eighteen months or so remains to be seen; data we're seeing in the bond market right now is confused. However, a new president and administration could work wonders for not only Americas reputation but also confidence and national mood.

On the other hand another nasty European land war could really shake people's confidence in The Euro and while increasing the safe haven attraction of the US Dollar also give rise to an opportunity for a pan Asian currency.

Post 1997 Asian economic collapse we were hearing a lot about an Asian currency bloc, lots of academic and professional conferences but it all seems to have gone quiet the past few years. Perhaps the rise of China as an industrial and world power, along with the decline of the US Dollar will give fresh impetus.


"All this won't necessarily kill the US economy, but it will burn off some of the advantages that go with being the global reserve currency, that is, Americans will have the same currency risk premium everyone else has always had to manage."

Spot on. Again, these things happen with a whimper not a bang. When England lost it's role as the world's reserve currency, they didn't collapse economically (they did have problems, but most were related to the World Wars, not losing the job of being the world's banker).
posted by Mutant at 10:26 AM on August 26, 2008 [2 favorites]

Wow! I messed up that table far worse than I imagined possible ... but it's the thought that counts, eh?
posted by Mutant at 10:26 AM on August 26, 2008 [1 favorite]

Thinking too deeply about money always makes me wonder why economies work at all. Money (paper, gold, ...) isn't value, it's a symbol of value. But figuring out how much value that symbol is worth seems intractable.

Let's take an example: Why does a new Honda Civic cost exactly 15k symbols? Why not 100k symbols, why not .01 symbols? I see 2 answers, but they both just shift the burden of explaining:

- If the price were lower, then Honda couldn't afford to make them. But this just shifts the burden to trying to explain why Honda's labor and material costs are what they are. And figuring out those costs just asks the same question again and again.

- If the price were higher, people wouldn't buy it. This is because most people have a finite symbol supply, and must therefore allocate it amongst all the various costs in their life. But this just shifts the burden to explaining why all those other items cost the amount of symbols that they do. This becomes the same problem as the first question.

This is recursion. The price of something is based on the price of everything else, and all those prices are based on the price of everything else. Once we start using symbols of value, instead of the value itself, I think we're all just making it up as we go along. But it appears to work, so what do I know?
posted by jsonic at 10:35 AM on August 26, 2008 [3 favorites]

The correct policy response, the only one that will ever let us be healthy again, is to stop using debt for money.

Maybe I misunderstand out of ignorance your use of the word debt here, but debt is not inherently a bad thing. Who did people get money from to start businesses or invent things or do research prior to debt? From their rich parents. Either that, or they got it from rich patrons, which is debt. Debt with the expectation of a big return is what enables regular people to do amazing things like start companies and invent/discover things or create art, isn't it? There is such a thing as TOO MUCH debt, but debt itself is a great enabler of progress and parity, isn't it? Or am I oversimplifying?
posted by spicynuts at 10:50 AM on August 26, 2008

Once we start using symbols of value, instead of the value itself,

Value is just an arbitrary assignment of what a massive amount of people are willing to part with in order to own something. There is no giant tablet in heaven that says 'the value of stuff is hereby inscribed".
posted by spicynuts at 10:52 AM on August 26, 2008 [1 favorite]

Once we start using symbols of value, instead of the value itself, I think we're all just making it up as we go along.

Yes and no. The price of a Honda Civic is determined by the price of the goods and services that go into creating and delivering the Civic to you -- the human effort and ingenuity to design the car, source the materials, build the factory, etc. All of which is done by people, who must be rewarded for their time and effort.

That's the value you're talking about -- what people perceive to be adequate rewards for their time and effort. Those rewards are variable, but they can be quantified, more or less, as material needs (e.g. a house, a family, college tuition, etc).

The symbols you're talking about, then, are several layers of abstraction of those material goals (e.g. although you might think it's better to be able to pay for your Civic in sandwiches used to feed the guys at the Honda plant their desired allotment of X calories of nutrition per day ... sandwiches don't travel well across the Pacific in ships).
posted by Cool Papa Bell at 10:53 AM on August 26, 2008

And you guys hate libertarians? Okayyyy...

I don't hate libertarians, CPB, I'm just afraid that as a result of the slimming down I won't be able to get the medicine I need anymore, at least until the Freedom Committees start taking wheelchairs for scrap aluminum. (With metals prices rising, I'm confident I'd just about make it out of a Barr administration alive.)
posted by StrikeTheViol at 11:06 AM on August 26, 2008

Malor writes "No way, PT. If you have a depository for the commodity or commodities in question, and you only issue currency based on what's in stock, then you're not waving anything into existence. That's very much a function that's best handled by government, but the laws should be ironclad, absolute, and untouchable."

Malor a couple serious questions: First, how do you establish the Aluminum standard? IE: how does the goverment collect the commodity depository in question in the first place? It would seem that the "value" of the commodity in question would soar at the first hint of any goverment needing to procure a massive, non productive, stock pile of a commodity followed by a steady decrease as the reserve was filled.

Second. What happens to the nice stable currency you've put in place when a new industrial process creates a new proportionally massive demand over and above the current base line. Say for example you chose Titanium as your commodity and next year some mad scientist discovers a desktop cold fusion process that requires massive amounts of titanium to function. Then again five years later someone figures out how to replace the titanium with sea water. Isn't your economy in for a roller coaster ride of fluctuating currency valuation?
posted by Mitheral at 11:09 AM on August 26, 2008

spicynuts -- "Maybe I misunderstand out of ignorance your use of the word debt here, but debt is not inherently a bad thing. Who did people get money from to start businesses or invent things or do research prior to debt? From their rich parents. Either that, or they got it from rich patrons, which is debt. Debt with the expectation of a big return is what enables regular people to do amazing things like start companies and invent/discover things or create art, isn't it? There is such a thing as TOO MUCH debt, but debt itself is a great enabler of progress and parity, isn't it? Or am I oversimplifying?"

Not at all, you've intuitively got a grasp on the issue, that's what's most important. You're absolutely correct - there is an optimum level of debt to carry and, without taking on any debt at all, all that's left is a financing technique known as bootstrapping, or expanding a business (or government) from retained earnings.

The way any entity - be it an individual, a company or a country - finances itself is a fascinating topic, one that not surprisingly carries much cultural baggage (this topic is called "Capital Structure", meaning how an entity assembles debt, cash and equity to finance it's operations).

In terms of companies, there is a sharp East / West divide. American companies like low debt, and rarely exceed a ratio of about one to one (this varies according to where we are in the credit cycle and specific industry however) - the less debt the better. A higher ratio and the company is referred to as "saddled with debt", and it's generally looked down upon by peers and customers alike.

Japanese business, on the other hand, typically will carry debt ratios of several hundred percent; technically insolvent by Western standards.

The same seems to be true for Sovereigns. For example, looking at public debt as a function on GDP, we see that Japan carries a debt load of about 195% of GDP, while the United States - for all our hang wringing over the deficits - carries a debt load of about 61% of GDP.

What it all comes down to is again easy to understand - how quickly and easily can the debts be paid?

To answer that we'd have to break up the debt into two components, foreign and domestic.

Well, we've seen that the United States debt to foreign entities is roughly six trillion dollars; in other words, the $53 trillion that's all too frequently bantered about is, as Muddler already pointed out, nothing more than a scare tactic. US tax receipts in 2007 totaled about $2.6 trillion [.pdf], so the foreign debt alone is manageable.

The remainder? As previously outlined, much of it reflects entitlements. I haven't been able to find data breaking out how much of that sum is indexed to inflation. Regardless, entitlements are a political hot potato to say the least, and it is unlikely we'll see the type of demonstrative and direct action necessary to reduce those obligations.

So it seems we're back to a period of relatively high inflation, followed by stagflation.

In other words, the late 1970's/early 1980's redux.
posted by Mutant at 11:24 AM on August 26, 2008 [1 favorite]

Isn't your economy in for a roller coaster ride of fluctuating currency valuation?

And now you see why Nixon wasn't entirely a bad guy.

Except for all that, you know, illegal shit.
posted by Cool Papa Bell at 11:28 AM on August 26, 2008

again, the issue is people and how far they can be trusted, not the definition of money

see, that's exactly why the value of all currencies should be pegged not to any commodity but to some more abstract but meaningful physical metric. for example, develop an international currency standard that measures the world's currency values in terms of a common, universally-accepted and physically constant unit of measure--a unit of energy, like the joule, would probably work best, because such a standard could be used to more directly link economic activity to the actual physical resources they free-up or consume.

so, as a company, your total assets would ultimately be defined in terms of reclaimable energy units, meaning that even if the local currency drifted up or down in value, the market value of the company and its assets wouldn't change with every fluctuation in the currency market. as a worker, you'd be compensated in terms of how much energy you burned over the course of a typical working day and some multiplier representing the current market value for the kind of work you do, adjusted for any special skills, experience or qualifications you have. similarly, since all the major currencies would be pegged to the international joule standard in this scenario, cost-of-living adjustments wouldn't be necessary, as wages would be calculated in local dollars in terms of their current value relative to the joule standard.

this approach would dovetail nicely with international energy policies: when a country puts more of its currency into circulation than current limits under established international energy policy permit (as defined in terms of the joule standard), it would devalue the currency and trigger inflation, providing disincentives for the behavior and slowing further economic development. this dynamic would also create incentives to adopt policies that aim to increase the value of the currency (and hence its spending power) relative to the joule standard, by achieving gains in efficiency and productivity instead of simply printing more money. of course, currency valuations against the joule standard would have to be adjusted periodically to account for population growth, changes in international energy policy, etc., and the demands of specific circumstances.

[end fantasy now.]

Who did people get money from to start businesses or invent things or do research prior to debt? From their rich parents. Either that, or they got it from rich patrons, which is debt.

No, they got it from American taxpayers, who originally earned it through farming, textiles and trading, before our entire economy somehow gradually morphed into a modern-day, larger-scale equivalent of the company store system. Almost all of the major innovations you seem to be thinking about (railroads, telecommunications networks, power grids, highways, the internet, oil and coal development, etc.) were heavily (if not exclusively) publicly subsidized at the outset and would never have seen the light of day if they hadn't been. See my rant on that here.
posted by saulgoodman at 11:28 AM on August 26, 2008 [2 favorites]

here's a nice discussion on "peak credit," cf. why inflation?

and here's a couple articles on the need for more savings.

oh and ebert¹ and the onion on IOUSA...

If anyone can make this kind of grim subject material palatable to a mass audience, it'd seemingly be Creadon, whose breezy, enjoyable crossword-puzzle documentary Wordplay was a sleeper hit. But Creadon doesn't sugarcoat a very real, little-discussed catastrophe in the making. All the sugar in the world wouldn't make his frightening conclusions any easier to swallow. Though the filmmaking is playful at times, the film is essentially 90 percent message, 10 percent movie. Then again, sometimes a message is important enough to make other considerations seem irrelevant.

A.V. Club Rating: B

also see the quiet bailout, cont'd, and creditors sometimes do get a vote:

“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” [Yu Yongding, a former adviser to China’s central bank] said in e-mailed answers to questions yesterday. “If it is not the end of the world, it is the end of the current international financial system.”

btw, a technical but interesting view re: the dollar, trade and productivity :P concludes...

The implication of both interpretations is that the dollar will have to decline further in order to effect a sustained (i.e., not just recession-induced) improvement in the trade balance [6]). Of course, there is no requirement that this depreciation will be against the euro -- and in my view it is unlikely to be [7]

cheers!
posted by kliuless at 11:35 AM on August 26, 2008 [1 favorite]

That's the value you're talking about -- what people perceive to be adequate rewards for their time and effort.

I understand that everything comes down to the cost of labor. Natural resources are free afterall, we just pay for the labor that extracts and transforms them.

But when we reward that labor with symbolic money, instead of actual value, I just don't understand how we figure out how much value that symbol represents. These workers decide how much symbol they want based on how much symbol everything else costs. And we're back to the recursive pricing problem.

Things like inflation makes this even more strange. How can the symbol cost of everything go up? Did the underlying value of everything all of a sudden go up?
posted by jsonic at 11:35 AM on August 26, 2008

for example, develop an international currency standard that measures the world's currency values in terms of a common, universally-accepted and physically constant unit of measure--a unit of energy, like the joule, would probably work best, because such a standard could be used to more directly link economic activity to the actual physical resources they free-up or consume.

If the US economy was based on a true consumption-production metric, it would collapse overnight. But in reality, money will head this direction as raw materials and usable energy resources grow more scarce.
posted by Blazecock Pileon at 11:39 AM on August 26, 2008

Mutant: For example, in 1999 the US Dollar accounting for some 70.9% of global currency reserves, with The Euro the next big player at 17.9%.

Starting in 1999 isn't fair.

A look at the first chart 1995-2007 from wikipedia

In 1999, the Euro was new, and people didn't trust it yet. You can see the combined German Mark, French Franc, and Others (Since they have dropped significantly in 1999, I believe they are most other Euro-area former currencies) drop as currency reserves 1995-1999, then, once people believed the Euro would work, where used at prior levels.

In fact, the chart indicates that the use of the USD has grown by 4.3% from 1995-2007 and the use of European currency has shrunk from (GM 15.8%, FF 2.4%, other maybe 9%) 27.2% to 26.5%
posted by rakish_yet_centered at 11:52 AM on August 26, 2008

saulgoodman -- "... see, that's exactly why the value of all currencies should be pegged not to any commodity but to some more abstract but meaningful physical metric."

Well, we've already tried pretty much any commodity out there to back currencies, and all failed, some more spectacularly than others. For example, for thousands of years we did try gold as an alternative currency system, and it failed for various reasons. Silver before that. On and on.

A topic I've found very interesting but largely overlooked by many people focused on alternative currencies such as gold, is the subject of complimentary currency systems; currencies that exist alongside of a mainstream currency, serving needs overlooked. These needs could be as simple as preserving purchasing power.

An example of this would be Calgary Dollars , intended to keep money in the community, and focus development resources. Others: Ithaca Hours, Toronto Dollar, Canadian Tire Money, Steinbucks, etc.

There are no fewer then 10 Community Currencies operating in Canada, and perhaps as many as 73 in use in the United States today. I was totally amazed there were that many.

Barring a complete economic and societal collapse I don't think you'll see a return to the gold standard or even a major change away from fiat currencies in the near term; but what you might see is an increase in Community Currencies as people become disenchanted with The Dollar or perhaps even The Euro.

The Complimentary Currency Resource Centre is a great place to start to learn about these things. Not only lots of research papers (most very accessible) but they also serve as a clearing house if one is looking for a currency in a specific geographical area.

It's an amazingly interesting topic.
posted by Mutant at 11:53 AM on August 26, 2008 [1 favorite]

re: an international currency standard

well there are SDRs and there's a proposal for the terra née bancor^1,2 [cf. the amero!] while some people still argue for gold, but why does there have to be just one standard of value?

...maybe the world could live without a single reserve currency. Currencies could compete[*] against each other, and gold, and other commodities. This is an age of computers; I’m not sure why there would have to be one standard of value, particularly, when the standard of value varies so much...

btw, here's a couple more quotable passages :P

I’m no great fan of central banking; I believe it makes our economy more stable in the short run, but intensifies crises when they take place (In my opinion, we never would have had the Great Depression if we had not created the Federal Reserve). Life under a true gold standard has real panics, but they are sharp and short.

At present, we are setting the stage for an increase in unionization. I am no fan of unions, but who can blame workers from seeking more bargaining power when they have had it rough for a long while?

[altho] Any liking that I have for a gold standard is that it gets the government out of the business of manipulating the economy through manipulating the money supply.

---
[*] or complement one another...
posted by kliuless at 12:19 PM on August 26, 2008

complimentary currency systems; currencies that exist alongside of a mainstream currency

I've seen these used for scrip-based charities, but keep in mind that complimentary currency systems are only as valuable as your intent and means to redeem them for goods and services. If you "buy Calgary Dollars" and then don't spend them, you've effectively given someone a tax-free loan of your real money.

An example of this in action is Disney Dollars or Microsoft Points. If you buy a Disney Dollar in Florida and take it home to Wisconsin, either as a souvenir or because you forgot to spend it while you were at the park, you've loaned Disney a real sawbuck, free, until you can redeem it again (presuming you remember to redeem it, and don't accidentally throw it away).

Similarly, Microsoft Points are sold in specific block amounts of Points, but the items to purchase often require an odd number of Points, leaving you with unredeemable Points, requiring you to either purchase more Points or save up blocks of unused Points until you have an amount capable of purchasing something.
posted by Cool Papa Bell at 12:40 PM on August 26, 2008

[few comments removed - take that shit to metatalk, seriously.]
posted by jessamyn at 12:41 PM on August 26, 2008

I propose a mixed solution : (1) devalue the dollar further, encourage tourism, etc.; (2) pay down some debt by cutting military spending, not electing spend happy republicans, etc.; (3) track which bonds were held by China, wait till China next invades someone, and then void their U.S. bonds. So you'd knock off 1/2+ trillion punishing China, but pay the rest "honestly". You can also demand balanced trade under the WTO agreement, sat after China gets nasty, which gives you tariffs that can directly pay down the debt.

Another neat trick would be transferring social security to the individual states, thus clearing a major debt on paper, and ending congress' overpriced slush fund. Your not even riddling the states with debt since social security pays for itself. Why not pay down the debt with social security extras? Well, isn't that technically using new debt to pay old debt?
posted by jeffburdges at 12:46 PM on August 26, 2008

Much as the idea of an energy based currency appeals to my geek nature [1], ultimately it seems to have the same problem as any commodity based economy: the availability of the commodity will change. Energy based currency sounds good, until someone invents fusion/vacuum energy/whatever, and it costs next to nothing to produce a terawatt hour of electricity.

[1] Hi Alpha Centauri!
posted by sotonohito at 12:50 PM on August 26, 2008

But when we reward that labor with symbolic money, instead of actual value, I just don't understand how we figure out how much value that symbol represents. These workers decide how much symbol they want based on how much symbol everything else costs. And we're back to the recursive pricing problem.

That recursion isn't a "problem" — at least not in your way of thinking — it's exactly how the economy works. It seems ridiculous, and at first it might seem like there's no way it could function, but that's pretty much how things work.

As others have pointed out, most money has little inherent value. Fiat currencies have no inherent value; commodity currencies (like gold) typically have far less inherent value (i.e. for industrial purposes) than they are traded at as currency. So their value is always somewhat arbitrary.

There's no reason why a Honda Civic costs 15,000 USD, except that 15,000 happens to be the number that covers all the real costs involved in its manufacture, plus profit. You could just as easily imagine a different currency where a Civic cost 1.5 "credits", and everything else cost 1/10,000th of its price in USD, so that a person who normally made $30k/year instead made 3 credits/year. Except for the slight obnoxiousness of having to carry typical transactions (buying things that only have a small real value, like a loaf of bread) out to many decimal places, it wouldn't be inherently superior or inferior to the USD system where a Civic costs $15k. Similarly, there are many real-world currencies where items like a car might cost millions of currency-units, and they make do just fine.

The recursion that I think you're seeing is called the wage-price spiral. Goods are priced according to the cost of the labor it takes to create them; workers, on the other hand, demand (or try to demand) wages that allow them to purchase goods. If you, as a worker, see the price of goods increase, you go to your boss and try to negotiate an increase in pay. If many employees do this, the company will have to increase prices in order to cover the increased labor costs, which might trigger even more wage renegotiations. Economists and central banks put a lot of thought into trying to keep this from happening, or at least to keep it from happening too quickly.

But fundamentally, you're not wrong to look at it and see a potential feedback loop between wages and prices; there is definitely one there.

What I suspect you will find if you continue looking into this, is that far more of the economy and economics in general is psychological than most non-economists (in experience, and this includes myself) tend to believe is the case.

For example, for thousands of years we did try gold as an alternative currency system, and it failed for various reasons.

While I don't want to come off sounding like Malor, I'm not sure that's entirely fair. Gold existed as a common medium for trade for thousands of years; it's only within the past century (arguably only since 1971) that we've given it up for a purely fiat-based system. I think it's a bit too soon to say that gold "failed" — we stopped using it on purpose, but I think in many ways our current system is still an experimental one. We found something that we thought was better than gold, and decided to use it instead, but whether it will work out in the long run or be seen as a momentary flirtation is really yet to be seen. (And will only be seen long after all of us are dead.)
posted by Kadin2048 at 12:52 PM on August 26, 2008

amazingly interesting indeed :P

btw, the pros and cons (politics) of selective default are pretty fascinating as well!
posted by kliuless at 1:10 PM on August 26, 2008

While I don't want to come off sounding like Malor, I'm not sure that's entirely fair. Gold existed as a common medium for trade for thousands of years; it's only within the past century (arguably only since 1971) that we've given it up for a purely fiat-based system.

and some currencies, like the indian rupee, are still backed by gold (though not as rigidly as in the past). so gold standard can work. many different kinds of currency systems can work. even bartering can work. there's more than one valid solution to any given problem--potentially infinitely many. but they all generate slightly different result sets. so the trouble is really figuring out what the point of all our economic activity is really supposed to be, and determining solutions that yield results consistent with those aims.
posted by saulgoodman at 1:18 PM on August 26, 2008

Oh great, the Agora Financial guys. These guys are really hard to take seriously, which is a shame, because they aren't entirely wrong. Here's an incomplete list of some of the dumbness promulgated by Bonner and Wiggin:

-- The gold standard. The man that they lauded as the world's greatest living economist, Kurt Richebacher, was adamant that gold was a bad idea as a personal investment and a bad idea as a monetary standard. Very occasionally they would admit that he said this, while misquoting him in order to downplay how strongly he believed it.

-- The bipartisan nature of our situation. Instead of making a straightforward case that Democrats and Republicans are responsible, they muddy the truth whenever possible in order to give credit to the GOP and take it away from the Dems:

-- Empire of Debt, which they coauthored, made the remarkable claim that Reagan was responsible for Volcker's tough stance against inflation. No mention that Carter appointed him, Reagan undercut Volcker's efforts at every turn, and didn't reappoint him. (Also, you will not be able to find any mention in any Agora website or newsletter that Volcker endorsed Obama -- and this was when Ron Paul was still in the race.)

-- In a radio interview with Charles Goyette, Addison Wiggin stated that Clinton only managed to run a surplus in one of his years in office. When a caller pointed out that this was a blatant lie, Wiggin responded by saying something along the lines of "I don't disagree with that." The caller was too stunned to get in a follow up.

As for the long-term treasury bonds, there used to be a newsletter published by these guys called The Survival Report, written by an economist by the name of Michael Shedlock. This newsletter, despite having some pretty good investment recommendations, ceased publication without warning a few months ago. Shedlock had a couple of beliefs which were inconvenient for Agora. One, he strongly believed that Obama was a better choice than McCain in the upcoming election. Two, like everyone else who thinks that we are now facing deflation, not inflation, he believes that long-term treasuries, and cash, are a great investment. (Note that he also believes that gold is a good investment, using The Great Depression as a guide to what will happen in severe economic turmoil, even when it's deflationary.)

I wasn't exactly surprised to see him go.
posted by UrineSoakedRube at 1:20 PM on August 26, 2008

Lest anyone feel daunted by how elusive the "value" of money is... the discussion predates MetaFilter! (For early examples, see: Ricardo & the labour theory of money, John Stuart Mill (good lord I just wrote Jon Stewart Mill) & marginal value.)
posted by ~ at 1:51 PM on August 26, 2008 [1 favorite]

One of the biggest worries about our current situation, one the gold standard folks wave around, is that China is sitting on billions and billions in USD reserves, and in effect they can crash the US economy by trying to dump all that currency at once (though much of it is in bonds, and as noted above the US could just freeze Chinese assets).

But what happens if the US goes to the gold standard again? The rest of the world won't. And because that gold is freely traded, China would start investing in gold mines and hoarding gold. After all, the principle behind holding gold would be identical to holding USD -- it's a solid, conservative investment in something that has guaranteed value.

If that were to happen... couldn't the Chinese do identical damage to the US economy by dumping gold on the global exchanges? After all, the value of US money would be dependent on the supply of gold out there AND the amount available in exchange.

Moving to a gold standard, or really any metal-based standard, requires that said currencies replace trading in that currency, whether through an outright ban on holding those metals (as in 1933) or in using the currency as a proxy for the deposited metal. Thus, aluminum could never work, since you'd be wrapping your Christmas turkey in money. Ditto titanium. It has to be (nearly) useless for general purposes and yet have perceived value.

And again, going to the gold standard would either require a massive currency revaluation (e.g. announcing 1 New USD = 10 Old USD, since we probably can hold or acquire enough gold to guarantee 10% of our current money supply) or else a round of crippling, interest-rate spiking deflation that would guarantee a depression on a scale the gold standard worshippers have wet dreams about already.

Maybe the situation we're in -- everyone holding every else's currency -- isn't so bad. In a sense, it guarantees mutually assured economic destruction. We now have a global economy, and we all hold each other's debt.

OTOH, we all hold each other's debt, so if one person defaults, we all default.
posted by dw at 2:14 PM on August 26, 2008

In a sense, it guarantees mutually assured economic destruction.

I completely agree with your entire comment, but just want to point out one thing: unlike MAD through nuclear warfare, some very, very scary countries have a significant pile of EconomicWMDs, like China and Saudi Arabia. And dark pools of liquidity (which are completely faceless) have the effect of financial terrorism. In addition, unlike the Cold War where we thought that a missile defense system would save our country, money flows through countries like the air we breathe. At any given point, money can rush in and rush out, and no amount of trying to defend ourselves will stop the flow.
posted by SeizeTheDay at 3:42 PM on August 26, 2008 [1 favorite]

In response to an overnight emails - yes, we are seeing more parallels to the late 70's / early 80's - The Fed's Fisher warns on inflation, even as energy prices decline and The US economy slows.

So stagflation: above trend inflation, below trend economic growth and above trend unemployment. Although these things rarely (if ever) repeat themselves precisely. So we could see much higher inflation with slower economic growth (even contraction) all while unemployment remains low.

About.com has a good overview on stagflation, and this FPP has an interesting discussion of the economic parallels between 1978 and 2008.
posted by Mutant at 6:44 AM on August 27, 2008

Well, we've already tried pretty much any commodity out there to back currencies, and all failed, some more spectacularly than others. For example, for thousands of years we did try gold as an alternative currency system, and it failed for various reasons. Silver before that. On and on.

Mutant: But a joule isn't a commodity. It's a measure of a unit of energy defined in physically precise, absolute terms. Whether joules are used as a currency standard or not, the fact is, every economic transaction can already be analyzed in terms of an overall energy value measured in joules. Whether we choose to be on a "joule standard" or not, the physical materials that tangible goods are made of intrinsically have a standard value that can be measured in the joules of potential energy locked up in them. And the production processes for those goods intrinsically have a standard value in the joules of mechanical energy they expend. And so on for the biological energy expended by workers in the plant and their supervisors, and the biological energy that consumers expend at their jobs to earn the money used to buy the product, etc.

In short, everything already has an absolute, precise value in terms of joules. So all you'd have to do to implement a joule standard would be: First, establish an arbitrary baseline ratio between joules and a particular form of currency (for example, let's stipulate that $1.00 US = 1,000 joules). Next analyze the overall size of the economy in terms of joules generated, expended, produced, and consumed (of course, good estimates and models could substitute for exact figures). Now you have a rational, physically-meaningful framework for determining the value of a particular currency. Suppose the absolute value of all US economic activity in a given period were 5,000,000,000,000 joules. In that case, there should be no more than 5,000,000,000 dollars in circulation. Any more money in circulation, and the absolute value of the dollar decreases; any less, and it increases. That way the value of the dollar always remains tied to the underlying physical/economic reality. (Actually, on preview, I'm not sure if this would be the right way to do this math, but hopefully you get the drift.)

No matter the psychological factors at play, the value of any currency on the joule standard would stay the same. So what if an infinite source of free clean energy came along? Nations with access to that technology would find themselves in a damn good position to compete economically with other nations, since their money would be worth some multiplier of infinity. Hell, they might even be so well-to-do at that point, they'd even consider sharing their secret and letting the rest of the world live like rich swines, too. But I doubt it.
posted by saulgoodman at 11:07 AM on August 27, 2008

Suppose the absolute value of all US economic activity in a given period were 5,000,000,000,000 joules.

On second thought, the measure used here should probably be US GDP in joules (or some similar measure of economic output) not the economy's absolute value.
posted by saulgoodman at 11:17 AM on August 27, 2008