From: Fred Moseley (fmoseley@MTHOLYOKE.EDU)
Date: Fri Nov 19 2004 - 10:08:53 EST
On Tue, 16 Nov 2004, 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. > > 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. ... > > 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. I agree with Allin here. Greenspan's attempt to conduct monetary policy in order to keep the price of this basket of commodities stable is a separate issue from money functioning as the measure of value and the determination of the MELT. Comradely, Fred
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