Mises SA blog

Following on from Gareth’s Bitcoin post, I would like to initiate a discussion around the functions of money vs. cash (the asset class, not the physical form of currency).  My hope is that this discussion forms a sort of case study in economics education (with me as the student).  I have an honours degree in economics and my understanding of economics, law, society, history, politics etc. are all congruent with the Austrian tradition.  However, I cannot call myself an Austrian economist, since I haven’t consumed nearly enough of the primary literature. Partly as a result, the ideas I have developed privately about money appear to differ from those offered by most Austrian economists. In fact, my impression is that these ideas are quite unique.  I consider this highly unlikely – a result of my relatively limited economic education. I shall outline these ideas below (with elaboration to follow in future posts), in the hope that this blog’s authors and readers point out their flaws and original/earlier sources.

Of course, one could argue that I should first properly study the Austrian monetary literature, before wasting everyone’s time with ignorant, half-formed thoughts.  However, by publicly presenting my present ideas about money, perhaps I can demonstrate how and why it is often misunderstood, even by anarcho-capitalist libertarians who are economically literate.

Allow me to begin with a question: do we still even need money? Consider the functions of money: medium of exchange, unit of account, store of value.  Given modern information technology and advanced financial markets, the first two functions are theoretically obsolete. With appropriate institutional and telecommunications infrastructure, any good or service could easily be exchanged for any financial asset (currency, bonds, stocks, options, unit trust shares, oil futures, platinum ETFs, etc). Similarly, any good or service or financial asset can be instantaneously valued in terms of any other financial asset.  For example, at the supermarket till one could pay for your Rand-denominated groceries in Swiss Francs (or copper futures), using the relevant exchange rate at the moment you check out.

What about money’s “store of value” function? Looking at the definition of money, I’m not sure whether this is even a function of money per se.  Rather, isn’t ‘store of value’ an attribute that a commodity / currency / other asset gains when it becomes generally accepted as money? Why or how, then, does it gain this ‘store of value’ property?

It is at this point that I should introduce my central proposition, that cash represents an implicit basket of forward contracts.  Allow me to attempt to explain this, albeit very clumsily.  In current financial systems, money is synonymous with fiat currency, and fiat currency is synonymous with the asset class of cash (the equivalence of cash and money may not necessarily hold in a completely free market financial system, but more on that later). Why do individuals and businesses hold cash balances rather than, say, shares in equity unit trusts?  After all, unit trust shares are highly liquid.  The reason is that the value of cash is (at least meant to be) fairly stable. Stable in terms of what? In terms of the goods and services you plan to buy in the near-term future (depending on the context, near-term can mean a couple days or a couple of years). This holds true to the extent that the nominal prices of goods and services remain constant. The less stable the relative value of cash (as with hyperinflation), the harder it is to plan for future consumption, production and investment. The consumer or business manager holds cash/currency not because it functions as money, but because he implicitly expects it to function like units of a highly diversified mutual fund consisting of forward contracts for goods, services, and other financial assets.  Thanks especially to government involvement, cash/currency doesn’t behave anything like this ideal, but it’s closer than any other asset class available to the average consumer or business.

Thus, fiat currency’s ‘store of value’ attribute is derived from its ‘pseudo forward contract’ properties, which are in turn derived from it’s general use as money.   As Robert Blumen puts it, “The reason that a medium of exchange necessarily is also a store of value is the anticipation of its exchange value in the future” (Is Gold Money?).

In a world of insignificant transaction costs and hyper-advanced financial markets (plus other assumptions I can’t think of now), instead of holding cash the economic agent would directly purchase forward contracts for the exact things he plans to use in the short term.  For example, I know with a fair degree of confidence how much milk, soap, electricity, petrol etc that I will consume six months from now. I could purchase these goods in advance from the institutions I plan to buy them from (hopefully such contracts could also be transferable, say between Checkers and Spar, BP and Engen).

In a free market monetary system, I think the most successful currencies to emerge would indeed be backed by highly diversified baskets of commodity futures (both hard and soft commodities). An exciting implication of such a system is that consumers’ demand (consumers here meaning households and firms) for different currencies would drive the price of futures contracts, thus giving producers much better information and expectations about the consumer’s future wants.

What of gold? My views on gold are similar to those expressed by Blumen above, and this Business Insider article of the same name. Suffice it to say for now, I think in the long-run market competition between different monies, private commodity-backed currencies (as described above) will be preferred to gold.

I don’t know how much of the above will make sense to my intended audience (which is mostly my fellow co-bloggers), or whether I am successfully conveying the concepts in my head. Please feel free to ask for further explanation – it doesn’t matter how basic the question seems…I could have made a very basic mistake.

According to the South African government’s consolidated expenditure in 2012/13, they spent over R88 billion on debt-service costs. Spending on “economic infrastructure” was just over R79 billion.

Debt-servicing costs are estimated to rise to nearly R119 billion in 2015/16.

These costs amount to nearly 10% of their total consolidated expenditure.

What happens when interest rates rise?

Source.

Mises SA founder Chris Becker has been featured on a major local news site regarding the government’s proposed  business licensure legislation. See the article here and Chris’s full letter here.

Acting cabinet spokesperson Phumla Williams said in response to Archbishop Desmond Tutu that “Research has confirmed that people in South Africa are feeling safer now than during the apartheid days. This is a direct result of the implementation of the policies and strategies by the South African Police Service. These include high police visibility and swift responses to criminal activities.”

That’s one argument. Another, more plausible one, is that the meteoric rise of the private policing industry has taken care of much of the mess caused by the failures of the socialised public police force. As Piet le Roux pointed out recently, the number of private security guards has more than doubled, and the number of private security companies has nearly doubled in the past decade. Private security guards outnumber SAPS guards by three to one.

Thus, deficits, whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden on the American people to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits.

- Murray Rothbard, Making Economic Sense,  Chapter 2.

Running wide deficits during times of economic slowdown is standard operating procedure in the conveniently-aligned world of government policy-making and mainstream economics. They’re called “counter-cyclical”, and are meant to aid the private economy in times of recession. But as Rothbard points out, even if times were good, their effects would still be a disastrous transfer, or crowding-out, of savings away from productive private investment, irrespective of how “efficient” or “benevolent” the regime soaking them away was.

Locally, the government projects that its 2013/2014 budget deficit will be 4.6% of GDP. This is the same as last year’s forecast, however the actual 2012 deficit was 5.2%.

As Russell pointed out in his post about the most recent budget:

…since Pravin Gordhan became finance minister, South Africa has gone into R600 billion more debt, and over the next three years could go into another R500bn more. That’s another R1,1 trillion of debt on your children’s backs that they never asked for and have every right to repudiate and reject. It is R85,000 of debt for every household, about R140,000 for every person employed in the formal sector, and about R300,000 for every registered income tax payer.

In return SA gets 25% unemployment, a moribund economy, paltry FDI, a weak rand, riots and protests, and growing income inequality.

Thus even without a grossly dirigiste government running amok, the broader economy is still all the poorer for allowing any government under any auspices to garner credit-induced purchasing power. The sticking point is, governments can defer a lot of the most direct and visible consequences of this policy, postponing the need for higher tax revenues and excusing away higher inflation. But the unseen and indirect consequences may fundamentally be the most harmful: wide-scale economic dis-coordination and malinvestment.

Ultimately, interest rates should adjust higher to overcome the imbalances or inflationary consequences and to put a cap on how much more rapacious the government deficit can become. But in a world where global central banks are in a race to be relatively more accomodative than others, and when the resulting capital outflows into countries such as SA put a dampener on market interest rates and lend support to the vulnerable currency, the government gets given an extended reprieve from the consequences of their actions. This is why, at the present time, they do not give a hoot about what the credit ratings agencies have to say.

Meanwhile, the nefarious beast is free to wander on, looting and extracting and causing all manner of economic malevolence. It will grow larger and larger from this lucre and, if all goes according to their plan, the people responsible for loosing it and benefiting from its plunder in the short-term will be long gone before any of them have to face responsibility for its mess.

Incidents of piracy in the Gulf of Aden have collapsed recently, with Yahoo reporting that:

The last merchant ship to be successfully hijacked, naval officers monitoring piracy say, was at least nine months ago. It’s a far cry from the height of the piracy epidemic two years ago, when several ships might be taken in a single week to be traded for airdropped multi-million dollar ransoms.

According to the EU, 2012 saw only 36 confirmed attacks, down from 176 confirmed attacks in 2011. Overall, only 5 ships were captured in 2012, down from 25 in 2011 and 27 in 2010.

Government officials and apparatchiks are tooting their own horns, claiming the presence of their boondoggle warships should get the credit. The truth is, these floating hunks of state extraction and state power had already been loafing around the Gulf  long before even the worst years of the piracy.

For many in the shipping industry, the fall in attacks is a vindication of the decision to massively ramp up the use of armed guards.

So far, not a single ship with armed guards has been taken by pirates.

What a surprise, the private sector fills the void of state provision, and even out-competes the vastly more resource-stocked government navies. Over at Mises.org, I wrote a few years ago about how gunslingers offer valuable and socially useful services demanded within the vacuum of state provision.

And while the state fails at protecting its own subjects, it’s also responsible for their plight in the first place. You see, when Somalia’s central state gang collapsed, all the other state gangs in the world stopped abiding by the international laws among state gangs. So Somalia’s coastline, the longest in continental Africa, was raped and pillaged with impunity by foreign fishing and waste-disposal vessels. Ordinary Somalians would have been well-within their rights to defend against this aggression of their property rights, but piracy as retribution transpired in its place as all the other international gangs care nothing for individual property rights and foreigners didn’t give a hoot in the absence of an “official” coastguard.

That’s not to say piracy is to be condoned, but there is cause and effect in this world, and when you and your buddies don’t respect the rights of others, don’t be surprised if the favour is returned.

Ironically, the mainstream press basically blames the victim by lamenting that Somalia has no central government to create a coastguard and receive sanction for its coastline from the other state gangs. This implies that the Somalis are to be doubly held hostage- on one level by their own local state gang and above that by the benevolence of foreign governments to care enough not to allow Somali property rights to be crushed by their citizens.

Whilst what’s happened to their coastline is regrettable, it should not be used as a clarion call for a state to be established. Sadly, this is precisely what’s been used to justify the constant foreign military invasions and interventions to try and “tame” the country by imposing a foreign-backed external government on the locals. In the absence of these external hindrances, Somalia would probably be doing greatly better. And by that I mean even better than it’s already doing.

This post originally appeared at Chrislbecker.com