Normally I consider myself a very CS centric guy. I do have other interests, and I'm quite aware of the world around me, but I certainly enjoy writing wierd looking LISP functions over reading the theory of relativity (more of that in another post). However, I came in contact with a new friend. We go to the library quite often. He generally reads books from almost every topic (and believe me any topic), while I normally confine myself to the holy precincts of the Computer Science section.
But due to our association for the last month or so, I have begun to appreciate other areas of knowledge as well. Be it through discussions, debates, expositions or whatever.
Now how does this leads to economics? A question struck me for which I could not think of an answer. I assumed that the basic foundation of all finance, markets, trade and economics is money changing hands. Now put in the law of conservation of energy. Can I say that all the money in the world is always constant? It is just changing hands, right?
Another question is if all of a sudden all of the countries of the world decided to have a common currency something like the Euro, what will happen? No question of the Rupee falling, forex reserves and all that. Will it be a step towards having a more equitable society? Will it be good or bad?
People who have the answers, please comment.
Something to think about
2 comments:
Well for the law of conservation of money to hold good we will have to expand our definition of wealth to include things that currently do not have a price tag.
For example consider a farmer, the crop he grows is considered wealth creation because the monsoon rains, sunlight etc. is not considered wealth as such. The money that changes hands is the other costs that he has to pay and the money that he makes by selling his produce. The same holds true for industries, they pollute the atmosphere, increase global warming but never have to pay for it.
So, unless you put price tags on almost every concievable resource, wealth will continue to be created by using up "non-money" resources. But I guess if you do put price tags, there would be very little difference between the money and energy laws.
Common currency?: very deceptive
I hope you have a lot of time as this is something very close to my heart.
Hmm... how do I put it? The thing is that having a single currency worldover is a very tricky problem. There is much more to it than what meets the eye. Firstly, it has nothing to do with equitable wealth distribution or anything like that. The concept of currency is still the same as it was when it was first conceived - a universally acceptable exchange mechanism. The authority which issues currency promises to exchange it with any other currency or gold or some bonds etc. Remember that line "I promise to pay the bearer a sum of .....", it means that if one wants he can exchange the rupees for an equivalent dollar form or gold etc.
In developing countries like India for example the standard is supposed to be the US dollar. Having a single currency would remove standards based on other currencies but you will still need to have a standard(maybe gold) against which currency can be issued. One cannot print currency arbitrarily, it will devalue the currency, and believe me would never help financial equality in anyway whatsoever. Take a look at our RBI for example, it is the sole authority issuing currency in India. We have all heard about fiscal deficit ie the govt. is spending more than what it is earning, so what can it do now? It borrows money from RBI, and what RBI does is that it issues new currency equal to the deficit and hands it over to the govt. For doing so the govt. gives some security such as bonds to the RBI. Now the credibility of the security against which the currency is issued decides how much that currency is valued. If some govt. issues currency wantonly its credibility goes down and the devaluation occurs. This is why fiscal deficit is considered so bad.
Now coming closer to the original proposition, a single currency. There is term called seigniorage which needs to clarified first. Seigniorage is the profit made while printing currency, like if you need to print a 100 rupee note and the cost involved is 5 rupees, you will need to have a security worth 105 rupees to issue 100 rupees. Now there are a lot of countries in the world where the profits made from seigniorage form a sizeable part of the govt's earnings(not in India though). When you have a single currency say US dollar and the US Fed Bank is the only one issuing notes then the seigniorage is all going to US which is very unacceptable. To get around this we can allow multiple currency issuers but then that is hardly any different from the present scenario.
The model which I personally favour is denationalizing the currency issuing business, allowing commercial banks to issue currency. Look at the current picture, RBI issues 100 rupees promising that it will redeem it for an equivalent amount say 3 dollars. Now since the RBI has a lot of political pressures other than the market influencing it, the devaluation of currency takes place very often. So you might endup getting 2 dollars for 100 rupees sometime later. Also you have no legal course of action to undo the damage since the "Govt." is involved. Conclusion: The quality of currency is not "good". On the other hand when you have commercial banks issuing currency, the scenario becomes very competitive. More than the legal option, the loss of credibility would prevent the commercial banks and their stakeholders to ensure that a devaluation is prevented as much as possible. So the full redemption of currency is assured. Yes, the regulation of such banks would not be easy but is still very much possible. So the full redemption of currency is assured. Currency would be of good quality, if we could get over some teething troubles.
If you believe that this is all fairy tale then pause for a moment. This is the model which was prevalent everywhere in the world a century and a half ago. The legendary Dutch bankers or for that matter even the Knights Templar were infact commercial banking establishments which issued currency of very good quality. The thing that you need to understand is that you do not "create wealth" by issuing currency, you merely facilitate the exchange of goods and services by providing a universally acceptable standard. So, you can never facilitate economic equality by currency changes. A very good example why currency issuing should be denationalized is China. The Chinese yuan evenafter recent revaluations is one of the most undervalued currencies, which discourages imports and gives an impetus to exports but is certainly not fair if seen from a neutral view.
The foreign exchange reserves that we keep hearing about are a cushion against loss of credibility. Like for example, the Indian currency has hardly credible outside. So if someone insists on being paid in some other form you need to be ready for that. Remember Gulf War I, India had very meagre forex reserves then, couldn't pay for the increased crude prices and so the resultant oil crisis.
The daily up down that you see in the value of the rupee is more of an aloo-pyaaz problem. The prices only reflect the current availability of dollars which are earned by exporters and spent by importers. Basically a liquidity problem. This problem will still be there even in a single currency scenario, here the price of gold(or some other standard) will go up and down as per the availability of the currency.
PS: Frankly speaking I am not really aware how the euro works, send me some link if you find.
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