This being one of my first posts on Amateur Economists I initially thought I would do an introduction. But then I happened on The Huffington Post article National Review Blogger Terrified Of New Five-Dollar Bill and it got my goat enough to change topics. They quote Mark Krikorian in his blog post at the National Review:
“Paper money has no intrinsic value, it can’t be redeemed for gold or silver, you can’t even make jewelry out of it. There’s nothing behind it but the people’s confidence in it, and when the government keeps changing its appearance, as it has with the successive redesigns over the past several years, that confidence is undermined.”
This argument has been made since long before we went off the gold standard, though if you write for the New York Post you don’t know this happened 75 years ago. Gold is an abysmal backer of money. It is ridiculously economically ignorant to think that any major economy today could operate smoothly on a gold standard. The price of gold has more than tripled in less than a decade. Seriously, what would the price of gold be if all the world’s major countries were hoarding enough gold to back their currencies?
The Wikipedia entry on the gold standard lists a number of disadvantages with using gold to back currency. However, these are no longer disadvantages but rather reasons why gold can no longer function in this manner. First off it states that there isn’t enough gold. I want to point out that this particular argument is incorrect. So long as the price of gold is allowed to fluctuate in a free market it would simply rise in price such that a dollar would be backed by a smaller amount of gold as the price rises. But if the value of gold is managed, then who gets to manage it and how should it be managed? If we are to manage the value of gold, then we might as well just manage the value of the paper money, which is one reason countries dropped the standard in the first place.
Perhaps the greatest problem, however, which is missed entirely, is that in order for it to work every country we trade with must be on the same standard and share a common value for gold. If the value of paper currency is tied to the value of gold and one country has no gold, then their currency is worthless and they cannot buy goods from our country. With a gold standard there has to be a conversion to gold associated with any transaction across countries on different currencies. Otherwise, we’re reduced to an inefficient barter system.
Most people probably don’t realize (I didn’t) that the U.S. has a strategic grain reserve. Well had. It’s almost entirely depleted. The United States Department of Agriculture (USDA) operates the Commodity Credit Corporation (CCC) which, according to the USDA site, performs the following functions:
“The Commodity Credit Corporation (CCC) is a Government-owned and operated entity that was created to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution.”
Some may recall that in the 90’s there was a big push to get the country off various forms of welfare including farming subsidies. A 1996 farm bill nixed government grain reserves and Farmer Owned Reserves (FOR), the latter of which was intended to geographically spread out the country’s grain reserves to protect against something unforeseen happening to the stockpiles. The reserves are just now running out.
Now that decision is looking to have been a very bad one indeed with this year’s corn crop caught in a perfect storm. One-hundred-year storms flooding the Midwest combined with an 8% reduction in acreage dedicated to corn will amount to a 10% hit on this year’s harvest. Then, too, there’s the rising demand from the ethanol distillers. In 2006, they used 20% of the corn crop, 27% in 2007, and the expectation is that ethanol will absorb somewhere around 40% of the 2008 crop. Though at $7 a bushel of corn, ethanol producers are losing money at today’s pump prices. Yet, since ethanol burns less efficiently than gasoline and requires special equipment, there’s little room to jack up the pump price without killing the market.
Corn is having a serious ripple effect out into the other grain markets and feed for livestock without putting much of a dent in the energy market. That’s got speculators and the hedge funds looking beyond the usual agricultural companies for ways to get in on the action.
There’s only so much many companies can do to reduce pollution. A steel smelter can scrub all it wants, and it’s still going to produce pollution. There’s no way around it. Pollution is an inevitable byproduct for many industries.
In order to look better on paper, companies offset their pollution by supporting carbon reduction elsewhere, purchasing credits from carbon reducers to offset their own carbon production.
In many cases, in order for the polluter to keep polluting at the same rate it always has, it buys credits from some random farmer who keeps doing the same thing he’s always done. So there’s been no real change in the level of overall carbon output.
In the future, however, carbon credits may rise in price to the point that farmers and others have an incentive to reduce carbon emissions further in order to sell more credits. Also, regulation may force carbon reducers to prove they’ve done something to earn the right to sell credits.
Believe it or not, there is actually an active futures market for these credits, and it’s blowing up. By mid April, trading volume on the Chicago Climate Exchange had already surpassed total trading volume for all of 2007! Since the beginning of the year, the contract price has risen from under $2.50 to nearly $7.50 then fell back to a current price* of $$3.90. It’s a hot but volatile market.
Besides trading in the futures markets, there are several ways one may be able to get in on this market. Chicago Climate Exchange is owned by Climate Exchange PLC (CLE) which trades on the London exchange. A couple of relatively new ETFs (exchange traded funds) are available as well: PowerShares WilderHill Progressive Energy Portfolio (PUW) and PowerShares Cleantech Portfolio (PZD). And XShares Advisers has an agreement with Chicago Climate Exchange to develop other ETFs.
*Editor’s Note: As of July 29.
At over $4 a gallon, gas is definitely putting the pinch on consumers. Wired writes, “No Mocha For Me, Thanks. I’ve Gotta Buy Gas.” We aren’t sweating the little things; we’re simply cutting them out.
The media is self-centered. It loves to write about itself without regard for whether its audience is interested or not. Lately, everywhere I turn I see “the death of print” articles sniveling over the struggling newspaper and magazine industry. They put the blame squarely on the Internet.
I squarely disagree with this assessment. No doubt some advertising dollars have shifted to the Internet and some readers have shifted their viewing to the Internet. So it’s a contributing factor.
But at the heart of it is gas prices. Consumers are having to divert a few hundred dollars a month to gas. Where does that money come from? It comes out of discretionary income, the money we have left over after paying our bills. It’s the money we spend on mochas, newspapers, magazines, and going out to eat.
One of the first things consumers are going to cut back on is newspapers and magazines. They’re still reading, but instead of paying for paper, they’re turning to the Internet and cutting out the cost of delivery. So the media is out the markup.
But more importantly, advertisers go where the readers are. It’s not that advertisers are preferring to advertise via the Internet necessarily, but rather advertisers are ticks and leaches. They go wherever consumers go. And gasoline prices have driven consumers to the Net.
Will they go back to print when times are better? That depends on how long it takes for the economy to recover. In part, they will become used to getting more of their info via the Net. Technology companies are finally seriously committed to coming out with products that make getting information from the Net easier and more portable. We’re seeing more UMPCs and Netbooks offerings, larger screens on cell phones, and better batteries. And the media is making their content easier to access via feeds.
Eventually, the economy will improve as it always does, but by the time that happens we may have already moved on and left print behind.