The Case of Brazilian Inflation: Perception Problem or Stealth Devaluation?

For decades, Brazil suffered from inflation. So much so, that public confidence in the currency (the cruzeiro) suffered. Prices continually rose from week to week.

So Brazil printed a new currency that always stayed at a fixed rate: The Unit of Real Value. (By the way, this is why the Brazilian currency is called a real).

If eggs cost 20 cruzeiros, they cost 2 URVs. If eggs cost 40 cruzeiros next, they still cost 2 URVs. Eventually, people started using the Real and inflation abated.

Or so the story goes.

Here's a good basic summary of the situation from NPR
A more detailed academic version is here.

Being a cynical sort, I ask myself if this wasn't a stealth devaluation of the currency? Goes beyond an innocous perception problem. Think about that.

Bitcoin Books

link to our bitcoin books in the catalog.

Book Review: Debt: The First 5,000 Years

What is money? Does it represent debt or stored value? And your answer to these questions carries a lot of implications.

In Debt, the First 5,000 Years, David Graeber follows in a long line of people that argue that money is debt/obligation, all economies are centrally planned in fact and so let's make the economy work for us.  

One reviewer's take follows:

"In advancing his thesis, Graeber introduces a number of anthropological and philosophical themes alongside a historical narrative of change. While the early chapters of the book engage with such subject areas as ‘Primordial debts’, ‘A brief treatise on the moralgrounds of economic relations’, and ‘Games with sex and death’, the latter half of the book is given over to a discussion of the changing role and nature of money and debt from the Axial Age (800 BCE to 600 CE) to the present day.

Three themes emerge as noteworthy for the economic historian: the myth of barter; the link between the introduction of coin as money and military activity; and long-run swings in the use of bullion versus credit money.

His conclusion is that the gradual extension of commercial or market exchange, primarily as a result of military imperialism, succeeded in reducing all moral obligations to a financial value, and in the process destroyed the ‘baseline communism’ that Graeber believes to have been the foundation of all social relations."

And this boils down to: 

"Only when we realize that paying one’s debts ‘is not the essence of morality’, but merely our current human arrangement, can we agree to change that arrangement for the benefit of us all."

Well, that's one take on the nature of money, and one you'll see asserted from time to time.

Money Changes You (but not the way you think): The Case of Ancient Sparta

Many societies have attempted to control how money is earned, saved and spent.

This seems to have been an attempt to create a centrally planned economy, to create a certain psychological state in the citizen, and to keep wealth within the national borders.

Here is the case of ancient Sparta.  According to Plutarch, the semi-legendary founder of Sparta, Lycurgus, mandated that money be iron trinkets rather than the more common gold and silver of the time.

You couldn't possess gold and silver, or any other objects that conceivably could store value, And the iron trinkets themselves were treated in such a way they could not be melted down and made into other iron objects.

It was difficult to earn, spend or save other kinds of money outside the official rules. It might be done, but was difficult and also illegal. 

So you're stuck doing what the system wants you to do.

And most people won't even think to notice this.

Bitcoin Founder Identified?

Police raided the home of a man believed to be the founder of Bitcoin, the crypto-currency.

The linked article is a great summary of the issues surrounding this innovative form of money.

Bitcoin Criticism

Here's a pretty good summary of Bitcoin criticism from Naked Capitalism.

(Having some trouble linking through to the Financial Times article referenced - will get that going soon)

The growing criticism of Bitcoin basically boils down to:

1) Its value fluctuates wildly
2) It is even more opaque than current fiat of money  
3) It is not anonymous -each Bitcoin contains the complete record of every transaction it has ever been involved in! 

Book Review: The Chastening

The Chastening: Inside the Crisis That Rocked The Global Financial System and Humbled the IMF is a very good book that will help you understand the modern, interconnected global economy. There are complex relationships between monetary policy, emerging markets, and foreign direct investment.

This book is about how the crisis of (mostly) Asian currencies in the late 1990s (Russia and Brazil also figured in this) threatened to bring down the international system of money and capital. The International Monetary Fund intervened, with controversial results. Were they helping or seeking to preserve a privileged status quo? Both?

The Chastening is another opportunity to learn about the nature of money, the IMF and international currency valuation. But I think I also learned a lot about the perils of too much foreign investment and unrealistic expectations in emerging markets.

As an American, you haven't had to learn too much about how currency devaluation, capital flight or exchange rates can rock your world. Welcome to the planet, friends!

If you're looking for clues for what could be coming to a trash-strewn, zombie-infested street near you, pick up this book.

Bitcoin and Virtual Currency Update

By now, you're probably aware that Bitcoin is a virtual currency. In a world of unsustainable currency creation, it's easy to see why virtual currencies would hold some appeal.

The status quo has noticed and decided to come down virtual currencies in a big way. Here's a roundup of where we are right now on virtual currencies.

Interest Rates on FRED

Decades worth of domestic US interest rates here.

Categories

Automobile Loan Rates (2) Bankers Acceptance Rate (5) Certificates of Deposit (21) Commercial Paper (25) Corporate Bonds (150) Credit Card Loan Rates (2) Eurodollar Deposits (9) FRB Rates - discount, fed funds, primary credit (21) Interest Checking Accounts (3) Interest Rate Swaps (24)

LIBOR Rates (150) Long-Term Securities (6) Money Market Accounts (3) Mortgage Rates (8) Personal Loan Rates (1) Prime Bank Loan Rate (4) Treasury Bills (21) Treasury Constant Maturity (48) Treasury Inflation-Indexed Securities (140)

Bitcoin Catching On?

We've written before about Bitcoin, the electronic currency that may be gaining some traction.

The New Yorker has a fascinating summary of the situation here. (another cool reason to use the library resources: you can't get to the full article on the open Internet) 

Bitcoin is untraceable, used by both peaceful nonconformist types and criminals, and invented by somebody or something called "Satoshi Nakamoto"- who doesn't exist of course.

It's pretty intriguing, given the ongoing debasement of official fiat currency. 

The inventor wrote a technical paper explaining Bitcoin here - it's quite interesting.

Book Review: Martin Mayer's The Fed

Martin Mayer's The Fed is probably the best book I've read so far about the Fed.

Not a history of the Fed, but rather an examination of the transformation of finance that begins in the 80s and really picks up steam in the 90s (where the book focuses).

Mayer picks up on the fact that central banks' traditional levers of control (money supply, interest rates) have been superseded by the new financial landscape beyond its regulatory powers.

Derivatives, the extension of credit and more have created different circumstances that the Fed cannot control. Mayer gently chides those who believe all risks are contained and knowledge is perfected.

A few early crises in the 90s are shots across the bow for the deluge that is here now.

Mayer was writing in 2001. VERY prescient.

 

Book Review: The Creature From Jekyll Island

 

Link to Our Copy of The Creature from Jekyll Island: A Second Look at the Federal Reserve

Just what is the Federal Reserve? It's actually a privately controlled system of private banks that decides the nation's money supply and interest rates, among other functions. As America continues to monetize its debt and flirt with a currency crisis, profound questions about who is doing this and why should be asked.

The author introduces the reader to the banking cabal that conjures our privately controlled money supply out of thin air (so far, so good). He then tries to push a paranoid, conspiratorial view of history in which mainstreet USA is being attacked by well-organized enemies. This elite is a true witches' brew: it's capitalist, feudalist, communist, socialist, atheist, and based in Europe and New York City.

Actual wonky details of the operations of the financial system, an intelligent discussion of why people might want a central bank (even if you disagree), and actual proof for multiple assertions are lacking in the book.

I can't really recommend this book. It's a poorly researched, simple-minded, nativist vision of the world for people that don't want real details - just a confirmation of their prejudices and beliefs.

I hope this is not your only introduction to the Federal Reserve.

However, I would recommend this book on the history of money, as well as my review on the great Austrian economist Ludwig von Mises if you want to understand a little more about money.

Do Banks Create Money? The Chicago Plan Says Yes

The Chicago Plan Revisited is an IMF paper that tackles the age old question: do banks create money? Traditional economists say no - see an exchange that lays this out here. 

However, this paper suggests that banks do, in fact, create money in a disguised way: through loans (which amount to more than the actual cash the bank has) and issuance of credit.

In effect, the banks create a great deal of the money supply in the world, leading to inflation and instability. What if that ability were regulated in order to mitigate the magnitude of booms and busts?

That's what this paper is about. 

BitCoin Heist

You knew this was coming: Hackers have stolen some bitcoins.

Bitcoins (which I previously discussed here) are private units of currency completely stored and traded on a computer. They were invented as a response to the weakening of fiat currency during the current financial crisis.

Supposedly they were completely secure and could not be counterfeited.  Well, it didn't take long to discover that what one monkey can create another monkey can steal.

Anyone who believes in the sanctity of digital-only info is naive.

This is why it's so dangerous to digitize property records - as we discussed here.

Historic Currency and Commodity Prices in Online New York Times Archives

You can get historic currency exchange rates, bond and interest rates, plus commodity prices, in old editions of our online New York Times.

Limit your search by date, and do a keyword search like price of gold, currency exchange, or similar words. There should be a brief article listing the prices.

A link to the New York Times archive from 1851 to 2007

Hat Tip: Rory Elliott

Book Review: Money and Man

Elgin Groseclose's Money and Man is a great summary of humanity's experience with money over the centuries.

It's a good read for monetary newbies to understand how the physics of money affects the real world.

This book starts with Greek and Roman use of silver and copper as money - which are dependent on natural supply rather than issuance. This static supply affects credit and economic growth in a society.

In Europe, the use of paper money only really came about after the Middle Ages and it's interesting to see the move away from barter and precious metals to a fiat currency (although often backed by precious metals).

Fiat currency can be quite advantageous, provided its issuance is governed by restraint and wisdom. Unfortunately, it rarely turns out that way, and ultimately the history of the world is littered with defunct and now worthless paper bank notes. Groseclose delves into the reasons why different paper currencies failed.

It's worthwhile for an American to familiarize yourself with these concepts, because we're relatively unscathed by monetary devaluation. In other words, we take relatively stable money for granted.

That could change.

Government not Happy with Competing Virtual Currency Bitcoin

A few days ago I posted about Bitcoin, the virtual currency, and wondered if it might catch on in an age of fiat currency instability and inflation.

And...just like that....Bitcoin has attracted the displeased attention of the government.

The government is concerned about Bitcoin being used by drug dealers. Whether or not that is only reason, I will leave for you to decide.

Interesting times.

Private Forms of Currency: The Bitcoin

One of the hallmarks of the future will be currency uncertainty. Whether that takes the form of inflation, deflation, devaluation, revaluation or a combination of these is unclear.

However, people are experimenting with new forms of currency (and they aren't state issued/fiat).

Take the example of Bitcoin.This is an e-commerce currency that is privately created and supposedly designed to guard against the shenanigans that befall fiat currency (inflation, etc...).

As this article points out, freeware Linux was thought to be unworkable as well.