From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Nov 17 2004 - 00:41:41 EST
Allin, thanks for the very helpful reply. At 11:33 PM -0500 11/16/04, Allin Cottrell wrote: >On Mon, 15 Nov 2004, Rakesh Bhandari wrote: > >>I just don't see the problem here with "the set equal to". > >[AC: as in the dollar's being "set equal to" x barrels of oil plus y >grams of gold plus z bushels of grain] > >>As I wrote on July 14th of this year: Say that Greenspan aims to >>ensure that x barrels of oil, y grams of gold and z bushels of >>grain sells for $1000 over the medium term. If that basket now >>comes to $1100, he sells bonds; if it comes to $900 he buys bonds. > >In my view, "set equal to" implies something much stronger that what >you are saying here -- something that is possible in principle, but >which as a matter of fact resides in fantasy-land: namely, the Fed >establishes a trading desk, through which they stand ready to buy or >sell unlimited quantities of the 'x*oil + y*gold + z*grain' basket >at a fixed price in dollars. You only have to spell this out to see >how unreal it is. > >My own take on the contemporary behavior of central banks is this: >They are concerned to maintain CPI inflation at a small positive >rate. If inflation seems set to speed up beyond the target range >they are worried, and they raise money market rates with the help of >contractionary open market operations (OMOs). If they perceive >inflation as likely to go negative they are even more worried (with >good reason, in the light of the history of capitalism), and they >react by lowering short rates with expansionary OMOs. > >Now, central banks like to be ahead of the game, and are always on >the lookout for leading indicators of CPI inflation -- so that, >ideally, they can act preemptively, before the "problem" even >becomes widely apparent. > > >That is the context of "special indexes" of the sort you have >mentioned. Some would claim that sensitive commodity prices serve >as a leading indicator for the CPI (with a lot of error and noise, >of course) -- and to that extent they can serve as a guideline for a monetary policy that aims to maintain CPI inflation within a target band. The CPI is a joke, politically manipulable and meaningless in its aggregate nature. Greenspan is using a basket of commodities in which gold features prominently as an end in itself. He is trying to ensure that the dollar depreciates vis a vis that basket in a very gradual and controlled way. Of course he may fail for a variety of reasons, one being the non cooperation of foreign central banks. > > >It's important, IMO, to appreciate that this has nothing whatsoever >to do with the concept of commodity money. Nothing. This is too strong. There is indeed an attempt to maintain a link between the dollar and a basket of commodities. But Greenspan has a lot more discretion than he would have under an actual gold standard. I have emphasized this throughout. > Commodity >money is when money is _composed_ of a commodity, or at least freely >convertible into same at a fixed rate. Think Isaac Newton at the >Mint: if the precious-metallic content of newly-minted coin of the >realm falls outwith the specified range, it's off to the Tower with >the Master of the Mint. My point is that the surreptiously implemented modified Baker gold standard indicates that "market society" can only partially decommodify and defetishize money. This is why the von Miseans are up in arms--they want the reactionary utopia of a true gold standard...think here Mark Skousen. But on the other hand the stability of bourgeois society proved incompatible with a radical decommodification of money; hence, the need for something like Baker's commodity index (if the US did not make such a secret agreement, willingness of foreign central banks to hold dollars rather gold may well not have been and would not today be forthcoming). The dollar is neither commodity money nor unconstrained fiat money. Money today is half centaur, half man. > >What Greenspan is doing is another matter: he's managing a fiat >money is such a way as to try to maintain a fairly slow and stable >rate of depreciation of this money in relation to the CPI consumer >goods basket, possibly aided by supplementary indices which possibly >serve as indicators of incipient speedups or slowdowns of CPI >inflation. No, I think the aid or the supplement is an end in itself. The CPI is manipulated to justify decisions that Greenspan takes on the basis of the Baker commodity index. At least that's the way it seems to me. >Note: to the extent the Fed succeeds in executing the policy I have >imputed to them, they accomplish something that would be next to >impossible with any sort of commodity money. What commodity basis >for money could one choose, that would produce the effect of a slow, >steady ongoing depreciation relative to the CPI basket? Exactly. This is was my point in response to Claus. There was a need for a modified gold standard which is what Baker's commodity index is. Rakesh > >Allin Cottrell
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