EvolvingWorld » Economy

Return to a gold standard?

tomh — Wed, 11 Mar 2009 23:37:08 +0000

Judy Shelton at the Commonwealth Club

Yesterday I attended a talk by Judy Shelton at the Commonwealth Club in San Francisco on the general topic of creating a stable international monetary system. Her talk was quite entertaining, and she certainly dropped a lot of names, indicating first name familiarity with Milton Friedman and Alan Greenspan. Her most interesting points concerned the benefits and possibilities of stabilizing the international monetary system by the return of a currency system at least partially linked to gold. She gave two arguments in favor of this. First, that currently the wide fluctuations in exchange rate are largely caused by speculation, and that a huge derivatives market exists to second guess these fluctuations. Second, that the lack of a stable monetary system makes it easy to print money which eventually will have to be absorbed by inflation.

One of the objections to a gold standard is that given the expansion of the world economy there simply isn’t enough gold to make it happen. The entire supply of gold every mined fits in about two olympic swimming pools, and the rate of mining has slowed down. The problem is that this amount times the price of gold is a fraction of the currency in circulation. Judy made the good point that it’s not necessary to back currency 1:1 with gold. For example, cash doesn’t exist 1:1 with money, because we only need cash some of the time, and suitcases of the stuff are a hassle really unless your in the mob. In the same way gold is in principle a nuisance to have around, so the issue is not that we need gold for each dollar, but you need to feel comfortable that you could redeem your money for gold if you so wanted, just as you currently feel comfortable that you could in principle get all your money out of the bank in cash. Based on that you could have a gold standard with only about 1-2% gold backing. Again, what makes it work is the legal discipline that a given ratio of gold to money is maintained, constraining the expansion of cash. The one puzzle with that is that it can still be abused. If a country pays lip service to this, but still prints too much money, there can still be a run on the currency and it would run out of money.

She also suggested that pegging the currencies to one another (say $-Euro-rmb-yen) would be a good step towards this, with the gold convertability added later. While various people such as French president Nicolas Sarkozy support this idea in principle, she wasn’t too optmistic that it would happen any time soon, given that the current theme seems to have more and more stimulus spending.

Thinking about the 401K

tomh — Mon, 02 Mar 2009 19:24:11 +0000

Back in the 80s it became common for companies to phase out defined benefit pension plans in favor of 401K plans. It certainly seemed like a great thing all around – companies shed the onerous burden of the pension plan, and employees got the freedom to invest as they chose potentially unlocking much higher gains. It was a good theory, except that the current economic crisis is making people think twice about this. Much to my own surprise, I’m starting to question it too.

I’ve gone through quite an evolution on investing over the years. When I graduated from school, I had no concept of investing. Over the years by circumstance I heard this and that, did this and that. Finally I got serious. I started studying and learning. I also got better results. It’s been an ongoing process. I’ve recognized two arduous truths: First, you can’t succeed at investment without a paying a lot of attention to it. Second, it requires a lot of knowledge. I find the more I learn, and the more care I put into it, the better it works. Conversely, if I get busy at work for a while, and ignore the market too long, the market changes, and I lose out.

But all of this flies in the face of the 401k! First of all, most of people want to treat this like a bank account, where you make a deposit at an arbitrary time, proceed to ignore it, and then expect at some other arbitrary time some positive outcome. This kind of simple buy-and-hold approach is flawed though. It’s like driving on the freeway: excessive lane changes are unsafe, but missing your exit is no good either. Even when investing for the long term, you have to think about when you enter, when you exit and where you’re going. That requires time, knowledge and attention. This is hard for many people, they lack the education and knowledge to make good choices, and often don’t spend enough time on the topic either, the more so because they don’t realize how much time they should be putting into it. So for many people in the long run a 401k plan can be a road to disappointment or disaster. Now if the average investor can’t do a good job of it, what’s the alternative?

Obviously, one thing missing today is simple: nowhere in school are kids taught about economics and investing. Personal finance should be a required course in high school and in college. No one should be turned loose on the work force without a basic understanding of managing cash and investments. This would greatly help a lot of people do better in the market with their retirement plans. But what about current employees? Can employers also provide training in this area for those employees who need it, as part of the process for enrolling in retirement plans?

Certainly this isn’t an easy situation, but socially it will get worse before it gets better, as I suspect that many of the baby boomers as they retire will release that they saved far too little and their investments fall far short of their expectations. I’m not quite sure what the answer is, but we’re definitely going to hear a lot more about this in coming years!

tom

The problems with CDO’s

tomh — Fri, 20 Feb 2009 19:47:01 +0000

This link is a nice, readable explanation of exactly why the mortgage crisis got out of hand. It wasn’t just making too many loans to people who didn’t deserve them that’s caused our problems, it’s what happened next that matters! The faulty assessment of risk is what create the appetite for making all those loans in the first place.

Economy: learning from japan’s experience

tomh — Thu, 19 Feb 2009 23:25:06 +0000

There’s an enormous amount of nonsense being written about the economy. It’s very hard to fish out well written material that really gets to the bottom of things. Here’s one article that’s quite useful in terms of explaining the current situation.