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Conversation Interruptus: Martin Wolf vs. The Daily Capitalist

By Jeff Harding

I am an avid reader of Martin Wolf’s columns in the Financial Times. I disagree with him quite a bit, but I find him to be perceptive, bright, and one who can think on his own. As you may know, Wolf is the Chief Economics writer for the FT, and is rather famous and renowned in the world of financial reporting and commentary.

I first corresponded with him on an article he wrote that claimed rising bond rates showed that inflation was here and that indicated we were in recovery. My message about that starts with No. 1 and our discussion goes on until No. 7.

Starting with No. 8, I had read his column on how to fix the banks, “The cautious approach to fixing banks will not work,” published online on June 30, 2009. The article’s blurb states:

The financial system had to be rescued from its own mismanagement of risk. This is not going to be changed by external supervision, which would be like moving the regulatory deckchairs on the deck of the Titanic. It is going to be changed only by fixing incentives.

He had some great ideas, but I was disappointed in that he didn’t address some of the more fundamental issues, including the government’s role in ruining the banks. We continue from there.

I think you will enjoy this discussion. Consider it to be the antidote to my conversations in “The State of Economics Education in America.”

He has promised a response to my rejoinder, No. 12, but it hasn’t arrived yet, although I have reminded him of it.

I am flattered that he would be willing to talk economics with me. I would guess he likes disputation to hone his thinking, as do I.

These conversations all took place in July, 2009.

1

Dear Mr. Wolf:

I finally got a chance to read your column on how rising bond rates show that govt policies are working. I am rather surprised by your and Krugman’s conclusions and couldn’t agree more with Taylor and Ferguson. Could it be possible that inflation expectations are driving demand for Tips vs unprotected Treasuries?

Jeff Harding

2

Dear Mr. Harding:

It’s possible – it was the thesis of my piece after all that inflation expectations are normalising. But I don’t think there is any credible account of the impact of excessive deficits now that would not include rising real interest rates.

Since you don’t cite any evidence for your views, I can’t really comment.

Martin Wolf

3

Dear Mr. Wolf:

I’ve re-read your article as well as Paul Krugman’s article on “The Big Inflation Scare.” I’ve been reading both of you for a while and I enjoy your commentary, but I don’t think Krugman is very credible. I should say that I am definitely not Keynesian, but Austrian (yes, that crackpot, but very accurate, branch of economics).

I think your comment on TIPs is entirely correct at present and that my assumption is wrong. While volume in TIPs has been increasing, I can’t say that its enough to reduce the spread. My take is that the bond market is wrong at this point and we are still facing deflation. Like most people, traders believe in the government’s ability to cure the markets.

Looking back at Niall Ferguson’s comments in the latest debate, I will say that good theoreticians are often wrong on market predictions, so I won’t hold that against him. On the other hand George Soros knows how to make money but I don’t he think he has a good grasp of any theory. But …

1. The bond market is normalizing, but I think this is wrong because I see more deflation ahead: housing, commercial real estate, liquidation of the big subprime trusts, securitized credit card and auto debt, declining wages, and so on and on. I think you are jumping the gun.

2. Crowding out hasn’t occurred yet, but it will. While corporate bonds spreads have narrowed, its a fake move. Ferguson is absolutely correct: when the $2 trillion is financed between now and September it will impact interest rates.

3. I understand you believe in Keynesian fiscal stimulus, but you have no basis to conclude it works. In fact, please tell me when it has ever worked? Never? The problem with the economy is not reduced consumption, as Krugman puts it, but too much debt, which is why we continue to deleverage (and consumer credit continues to contract). I’m not going to argue theory here, but everything Krugman recommended to the Japanese was tried in some fashion and never worked. Please don’t use his excuse that they didn’t do enough, soon enough. Krugman also has no basis to state that the rising level of savings will sop up treasuries.

4. When the deflationary period bottoms out, loan demand will revive and then there will be no way out of inflation as the money expansion hits the economy. Since Bernanke-Geithner-Summers all believe that rising interest rates will destroy the economy, how can they withdraw the massive credit expansion? They can’t.

Lets wait until about September to see who’s right.

I write an economics blog, and one of my recent posts was specifically on Krugman’s inflation nonsense. I write from an Austrian perspective and its quite a different look at the world: The Daily Capitalist.

I look forward to reading your columns in the future.

Jeff Harding … Continue reading Conversation Interruptus: Martin Wolf vs. The Daily Capitalist

What Is Money? Part II--A Fable

By Jeff Harding

A long, long time ago there was a wheat farmer named Jeff, and after harvest he had 100 sacks of grain left over after he figured what he would need to live on until the next harvest. Jeff wanted to get one of those newfangled plowshares with a bronze tip. So he went to his good buddy Red, the blacksmith, and asked how many sacks of wheat he wanted for the bronze thingie. Red said, “Jeff, I don’t need any wheat; I’ve got wheat up the wazoo from you damned farmers. What I need is more ore to make bronze. Go get me some ore and I’ll make the plowshare.” It took Jeff a while to find someone who would take a few sacks of wheat for some copper ore and even longer to get some tin ore. Finally he got his bronze plowshare.

Sitting down that night with his snappy new bronze plowshare set on the kitchen table to show it off to his family, Jeff said to himself, “What a hassle that was to get this thing. What if there was a way to hold my excess grain [which he called ‘capital’ for some reason] in another form until I choose to spend it on something I need? That way I could get rid of my grain before it spoiled or the rats got it. What other good or commodity could I hold?” He thought about it all night. Shoes? (too many foot sizes to order). Copper ore? (too big and messy to carry around and exchange). Copper or bronze? (they were making so much of it now that it would take too much to buy things like a donkey or a cart). Spears? A sack a dozen. What is the something that everyone wants?

Then it occurred to him that gold would be perfect: it’s hard to mine and refine, there’s enough around but not too much, everyone wants it, it can be divided up into smaller and smaller pieces, you can test its weight and standardize it into units, it’s durable, malleable, and easy to maintain. He shouted out, “I will call it ‘money’ which is a much cleverer word than ‘medium of exchange’.” It was as if the words just popped into his head.

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So Jeff went back to Red the blacksmith and Red’s clever son and told them his idea. They thought Jeff was brilliant and they pooled their resources, bought some gold, refined it, stamped it into little round disks of equal size and weight, and put “1/10 Ounce Fine Gold” on one side and “Bank of Jeff, Red, and Red’s Kid” on the other side. It was beautiful to see. Soon everyone in the village accepted them in exchange for goods, so they made more, and pretty soon the whole county was using them. They earned a little bit off each disk for making it and they guaranteed it as to weight and purity. Trade exploded. Later, Red’s son bought out Jeff and Red, and Jeff went back to farming. The son changed the name of the enterprise to “Bank of Red’schild” and became very successful.

Red’schild was brilliant in his own right. He invented banking as well and lent out money and charged a small fee for doing it. Red’schild thought a lot about gold and trade. He thought that it would be much easier to carry around pieces of paper rather than a lot of heavy gold coins. So, his bank issued what he called “gold receipts.” Each receipt said the holder owned gold in a specified amount (one-tenth ounce, one ounce, ten ounces, etc.) held in the vault of the bank. Traders thought this was a great idea and exchanged their gold coins, got gold receipts for the coins, tucked these pieces of paper into their purses, and traded the paper for goods far and wide. Pretty clever. It worked great because Red’schild was trusted. Red’schild got a little fee for each receipt he issued. Trade grew even more. He grew rich, retired, and turned the business to over to his son, Red’schild Jr.

… Continue reading What Is Money? Part II–A Fable