Friday, August 24, 2012

What I'd do if I could

Its been a while since I've had anything that I felt was worth posting about. Ive got two or three half posts in the "Hopper" but I just couldnt complete the ideas satisfactorily.  This is going to be a different take on an earlier post of mine where I imagined a day when a part of our country seceded and examined how they might go about setting up their own monetary system. I imagined an interview of someone else in the position of creating a country/monetary system and tried to see what kind of questions would need to be asked and answered. I would write that post a little differently today because I have acquired new information in the interim and have developed some of my thoughts to a greater depth but the overall view of that post remains; If your going to start your own country  you need your own money and whatever money is used there will be a "state" making a choice about some very important things. The choice they make will mean differences in levels of freedom and levels of aggregate wealth.

Today Im going to be the guy has been put in charge of developing a monetary system for our a new country.  Maybe I go in with some German guys and buy a couple Greek Islands.... I dont know or a couple million of us petition the US govt  to let us have a portion of land on the Left Coast of the United States and create our socialist paradise. I will have to take a page out of the neoclassicals playbook and make a couple very dubious assumptions. 1) We didnt need a war to get to this point 2) Most/all who are going are behind the project and understand fully what we are embarking on (perfectly rational agents with full view of past and  expectations of future)

One of the points I hope to illustrate is that during this time of creating a new country and its monetary system is that these decisions are being made BY GOVERNMENT.  Its not a matter of starting a new country, delineating borders, picking a leader, start trading stuff or use the money you have left over form your old country, bring in some banks and over time a new "best" currency emerges by consensus.  In the modern world especially a monetary system is by the government and for the people.
There are many options to running a currency. Peg it to another currency or a commodity or let its value float? Do you allow this currency to trade as a commodity on the currency markets or even if you desire it to will investors have any interest in it?  How will you arrange the way your Central Bank functions with a Treasury?  Will you even have a Central Bank?  These are all political decisions and have no free market which shapes them much, but these decisions you make will impact the private markets you hope to be vibrant in your country.

So how would I do it if I could?  Seems to me there are only a few real options but I ll go over what I see as all the options and try to eliminate the bad ones.

 We could operate like the 51st state and use the US dollar.  We would have full leeway as to how we set our institutions up like our tax system our court system our road system our school system. We could determine what level of govt influence or spending we put to these systems. We could make it as publicly driven as we like but if we are using the US$ we have constraints as to how much we spend.  That constraint is how many dollars we can get.  Within this state we would certainly have some production capacity already (not a totally dubious assumption yet in reality not as simple as it sounds) and some resources that would be ours to extract, refine and create stuff out of but is it possible that we have everything we need?  Doubtful. Now if everyone there were happy to live only on the things which we produced ourselves, ("Buy Left Coast  first...... and second.... and third" could be our state motto), we could exist, survive and be happy but we would have constraints on growth.  This option does not sound like one which enhances our freedom or one that gives us a lot more options from where we are now.  I think if you are seceding from somewhere you must stop being beholden to their currency.

We could go the route that many libertarians push for. A private banking driven, sovereign, gold standard  currency.  What questions would I have about this arrangement?  First off, if we are going to go with gold standard, where do we get the gold we need to back our currency.  I will grant that we have some land with gold within our borders but (this is another neoclassical level assumption that would be a huge game changer if false.) how much is the right amount for our population and the amount we intend to spend.  Ive seen some goldbugs say that its not necessary to set an exchange rate with a gold standard but if you dont guarantee an amount of gold for x amount of your currency what is the reason for a gold standard and how would that be any different from the US today? Putting aside that particular discussion, I WOULD set an exchange rate of gold for our currency if I were to choose a gold standard but my question would still be.... How do I get the gold I need?  I have to pay for it somehow. No one is going to give it to me to go start my country.  Would all the dollars my now Left Coast  citizens still had have to go to buying the gold we need to start a currency system?  Actually it would likely be the banks that would have to answer this question as well.  How does a bank, created ex nihilo, acquire gold reserves?  What can it spend on gold when the previous currency of the new country is no longer desired by the citizens of that country? Answer me that gold bugs.  Additional questions I have about this libertarian utopia are how will you interact with the rest of the world. Seems to me that the situation I described above where it would all "work" fine if you just consumed only what you produced equally applies to this scenario.  If you are the only place using gold for money, what do you get in payment for the goods you might wish to export? If you wish to import how do you keep your gold supply up?  It seems to me that this is not only not an improvement over what we have today, here in the USA, its even worse than above. Especially for those who value freedom as highly as libertarians profess to. In this instance your soveriegn but you limit your ability to spend to how much gold you have.

So lets scratch a gold standard off the list if we want a vibrant new world economy that interacts with the rest of the world and tries to give its citizens the best life they can achieve

How about a private banking driven system with no gold standard?  Each bank just issues its own money and there are multiple competing currencies circulating.  The currency you are paid in might be different than the currency which a store prices its goods in but exchange rate tables are everywhere so its just a math problem. Eventually the soundest bank currencies start to squeeze out the weaker ones and we are all better off because we are all using a sound currency that for the most part exchanges one for one.  So when we start this country everyone already has dollars.  Thats the only money we ever used, maybe some converted it to some commodity before the change over but they are on the margin. Most everyone kept their dollars because they needed them to transact.  So when "First Left Coast Bank" opens up what do they do?  Seems to me step one is acquire some capital.  Ill go all neoclassical again and "assume" that most of these banks were here when the previous regime was in place AND they just kept their "real" capital in place.  They would hold some US Bonds , some real estate maybe some gold or other commodity contracts but they would still have the question of "what do we have as capital that we can lend against" to answer.  In addition, when they go about taking deposits, the only thing every other citizen has are US$. So they must take a US$ deposit and then decide how much "First Left Coast Bank" bucks they are going to extend to them in credit.  And each bank will make this decidision differently.  This doesnt sound easy, smooth, better, efficient or more freedom procuring to me.  It just sounds like a mess.  So Im scratching this off the list.

So how about we just play all dictator and stuff and just tell our citizens,

"In spite of what the Zero Hedge morons proclaim your US $ are not worthless. You can keep them if you like and go to the US and buy stuff or you can exchange them to your new national Treasury for  "Lefties". We will give exchange at the rate of 1.5 Lefty to a dollar. All transaction within the Left Coast will be in Lefties and anything we purchase from outside our borders will be with Lefties.  It may take some time for our Lefties to  be accepted but I have a few suggestions for you to speed up that process.  Keep doing your job to the best of your ability.  What we produce says something about us. Remember, produce something you'd sell to your neighbor. If your neighbor has a problem with it youll never hear the end of it so make it something he'll have no complaint about."

Now every Left Coast citizen knows what they will get for their old currency.   What does the Treasury do with its acquired US$?  Well it can certainly go and procure goods and services that it is unable to produce in house as long as their is a dollar price on that, and of course this requires another "neo-ass" (shorthand for neo classical assumption) that these dollars would be honored, they could say No Left Coast dollars.  NOW banks can enter the picture, because the citizens now have a net worth in Lefties that can be assessed and an appropriate loan amount can be determined.  Seems to me until this point banks have no reference point other than some real asset which could be of indeterminate value.  It seems that until a bank can determine your net worth in something pretty ubiquitous loaning is a very high risk operation. So high risk that most borrowers would say no thanks.  Would Left Coast have a Central Bank? Sure. The system would need a borrower of last resort and lender of last resort to keep payments flowing but Im not sure there needs to be a lot of manpower dedicated to it. It could mostly be a computer program that  simply issues electronic reserves and measures banks health via an algorithm designed by conscientious bankers (I know there are some). We definitely dont need these annual treks to Jackson Hole where nothing of substance happens just a proclamation  that "We are concerned about blah blah blah in the global system and we wish for further emasculation of our fiscal bodies so the fate of the  worlds economy is at our behest........ oh and Milton Friedman rocks!!!"
Additionally, since we can never run out of our Lefties I would provide a citizens income to everyone form birth.  As a citizen it would be your right. The exact administration of this would involve ways to add to it for certain education milestones being met or deduct from it if certain violations occur. Financializing more of our life seems inevitable so why not find an acceptable worth for a newborn citizen and one who meets certain criteria as they age.  Now banks have a minimum income they know can be used to pay back loans.  Seems to be a stabilizing force to banks.  Might it result in fewer consumer loans, likely, but I dont view that as a negative. Although people might be encourage to take more risks if they werent going to lose everything so I dont think its a given that this  would lead to complacent citizens who just spend their dole money on basics and dont search for innovations.

One thing I need to point out is that it would additionally be necessary at some point, maybe not at first but eventually, to assess a tax in Lefties.  This tax would simply be necessary to insure that Left Coast citizens seek some lefties.  At some point, once the economy is up and running,  we might find people preferring to just cross the border and work for dollars which would be fine to a point but might  reach a point where Left Coast businesses cant find labor.  To keep our currency area going and to keep us from devolving into a 51st state which just uses dollars but has no rights, something would be needed to keep people seeking and hopefully saving in lefties.  It seems to me its just a fact of modern nation states, if you wish to have autonomy you should have your own currency but to keep your own currency viable some form of gentle coercion (no 9mm necessary hopefully) thru taxation would be necessary.  Some citizens might think of their taxes as "paying for their govt" but your treasurer would know better (that that citizen wouldnt have the lefty to pay the tax unless the treasury had issued it first)

I just cant see any market mechanisms that this new country could use to find a new currency but I m open to someone showing me some.