From: Allin Cottrell (cottrell@wfu.edu)
Date: Tue Nov 16 2004 - 23:33:38 EST
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. It's important, IMO, to appreciate that this has nothing whatsoever to do with the concept of commodity money. Nothing. 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. 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. 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? Allin Cottrell
This archive was generated by hypermail 2.1.5 : Sat Nov 20 2004 - 00:00:01 EST