Saturday, July 03, 2004

Government Money

Add money to a barter economy and transactions costs fall dramatically. Yet, money is inevitably a commodity and its own price becomes the subject of bets. But the price of money affects all other prices so swings in monetized relative prices become much more complex.

Relative prices are supposed to change flexibly. "Price levels" are not supposed to change. But how can we tell which is which?

CPI reports, for example, feebly differentiate between measured inflation and "core inflation" once volatile food an energy prices are subtracted.

In truth, central bankers simply do not know what is going on. The Economist reports on a paper by economist Stephen King that points out that there was no threat of a U.S. deflation last year. Rather, there was, "a reduction in overall prices caused by rapid technological change, improvements in terms of trade and other factors."

Central bankers, like all central planners, have two problems: politicization and limited information. Alan Greenspan and Paul Volker are rightly given credit for avoiding the politicization that their predecessors had sunk to, but have they "solved" their information problems? Not if Greenspan and the FRB fought off a non-existent deflation last year -- and are not likely to read the tea leaves any better soon.

Privatize social security, the schools, the mails, water delivery, the highways, the radio waves --- and money. The sectors beset with the "crises" that we hear so much about.