According to the article, Venezuela is currently sending oil to Cuba, and Cuba sends doctors to Venezuela to provide free medical services to Venezuela's poor. Let's throw some numbers (pulled straight out of my ass, FWIW) on this and look at the values being exchanged. Suppose one barrel of oil equates to one eight-hour day of work from a doctor, plus his food/housing/per-diem expenses for that day. (In practice, this is going to be fuzzier, because of overhead; there are transportation costs, so it's more worthwhile to spend 28 barrels of oil + 1x transportation costs to send a doctor to Venezuela for four weeks straight than to spend 28 barrels of oil + 4x transportation costs to spread those four weeks out over multiple visits.) Suppose also that an average doctor visit takes half an hour. So, with these arbitrary numbers, one barrel of oil == basic medical services for 16 Venezuelans who wouldn't have received care otherwise. Cool!
But now let's phrase this in terms of a fluctuating money supply. I'm not sure how the Venezuelan currency is valued these days (the bolivar was pinned to the dollar in 2003, but it's suffered severe inflation since then), but oil is Venezuela's major export, so the purchasing power (in currency) of a barrel of oil is definitely affected by fluctuations in foreign currencies. So. Suppose Venezuela was selling crude oil to the US in July 2007 for $75 a barrel. Today's spot price for crude is about $91/barrel (down from a November high of $97, by the way). That's a pretty significant jump, about 21%. Suppose also that in July, a barrel of oil would have been enough to pay for a full day of work from a doctor. This is kind of absurd, because it assumes paying doctors $9.375/hr, but remember, these are made-up numbers meant to illustrate a point about currency fluctuation. So our ridiculously underpaid doctors still expect the same amount of money, but we have that; we got it when we sold that oil back in July. 16 Venezuelans still get health care, but gee, wouldn't it have been nice if we'd held onto the oil and sold it today, when it could have paid for ($91 / $9.375) = 19 Venezuelans getting health care?
Of course, we couldn't have known that the oil price would spike -- what if it had dropped to August's sub-$70 levels? -- but wait, it gets worse.
The rate of inflation is growing worldwide. In some places it's growing much faster than others, but in the US it was 4.31% as of November and has risen by about .8% every month since August. Inflation means that a currency's purchasing power drops, so people being paid in that currency have to demand more for their work in order to keep up with increasing costs. So if doctors now demand $10/hr for their services, we can only pay for 7.5 hours of work with the barrel we sold back in July, meaning only 15 people get to see the doctor. Sucks to be that last guy.
"But Meredith," I hear you say, "isn't this all just supply and demand in action? China and India are industrialising in leaps and bounds; the demand for oil is going up, so of course the price is going to rise, and if that means that consumers have to face increasing costs for goods and services and thus demand higher wages, isn't that simply the price of doing business?"
Oh, if only it were that easy.
A shortfall of goods in a regional market (perhaps caused by increased demand for those goods in other regional markets) will certainly result in an increase in the price for those goods. However, this is not inflation. Inflation is, quite literally, an increase in the size of the money supply -- the absolute number of currency units in circulation. So it's important to distinguish between price inflation and monetary inflation. Price inflation fluctuates with supply and demand. Monetary inflation fluctuates with the size of the money supply. Price inflation cannot cause monetary inflation; only the central bank creating more money (by printing it, or by issuing bonds or Treasury bills) can cause monetary inflation. But monetary inflation is always a factor in price inflation. Other influences on price, such as increased supply or decreased tariffs, can mask monetary inflation's effect on price inflation, but monetary inflation always has an effect on price inflation. (If the Fed prints more money at a time when prices are falling due to increased supplies of goods, ask yourself just how much lower those prices might be if the money supply hadn't been inflated.)
Just four days ago, the European Central Bank refinanced 348.7 billion euros at below-market rates to keep banks afloat over the next few months. The Federal Reserve is also busy injecting money into the US money supply to bail out the subprime mortgage lenders who are taking a bath on foreclosures right now, as
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ernunnos has been predicting for the last year-plus. (That European currency injection? Direct response to the Fed mortgage bailout. European banks are heavily invested in US real estate too, and they know they're about to take a gutpunch from hell.) The world is busy printing money to shore up the population of today against mistakes it made five years ago, without giving thought to the effect it will have on people five years from now. It's shortsighted and dangerous, and I fear for our future.So, in the face of all this, I welcome an exhortation to embrace the barter system. We'll still have price fluctuation, and in many ways it will be more difficult to track; as baroque as the debt-backed currency system is, it's still possible to grasp the basics after a few days of study and analysis, and the rest is just observing trends. But an economy literally based on the exchange of goods and services is much closer to a free market than one based on a currency pulled out of thin air. Congratulations, Mr. Chavez -- you're an Adam Smith-style capitalist!
Now, lest I come off as an unbridled optimist here, let me point out that I'm well aware that there are risks here too. Any medium of exchange can be debased -- dollars, oil, even gold. But I argue that it's easier, practically speaking, to quantify the effects of debased goods than it is to quantify the effects of debased fiat currency. A BTU is a BTU, whether it comes from oil, solar, wind, or a guy walking on a treadmill. When I lived in Iowa, I quit buying the cheaper-per-gallon mid-grade gas in favour of regular unleaded when I realised that the ethanol-adulterated stuff translated to less energy per gallon burned. I was actually paying less per BTU for a slightly more expensive gallon of fuel, so I paid a bit more at the pump in exchange for going to the gas station less often.
Do the math, folks, and look at what you're buying. Exchange value for value, and think in terms of worth, not dollars.
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Comments
Or are you suggesting tying a currency's value to a particular good, like gold, or oil? That's fraught with it's own peril - what happens when a new use for gold comes about? What happens when new techniques appear for pulling more gold out of the ground? What happens when someone figures out how to synthesize gold cheaply and practically on a large scale? Fiat currency at least isn't at the whim of human invention.
But the whole point of the last half of my rant above is that fiat currency is absolutely dictated at the whim of human invention -- or, more properly, the whim of human whim. Ben Bernanke can arbitrarily decide to authorise the injection of a trillion new dollars into the economy, and wham, it's so -- the Fed has basically no oversight whatsoever, and its actions are very, very difficult to reverse.
I mean, by the time I get done with my JD I'll have had to do in theory 7 years of school (actuality will be 9-10, but 2 of those are me getting sidetracked to the history degree and if it's 10, 1 will be due to me being, y'know, less than healthy)
So...how do you value intellectual output in that kind of a system? It seems to me that it's likely to get devalued from where it is now - that your doctors and lawyers and other highly educated positions are going to lose some of the paycheck that is a big incentive towards most people that go towards those careers (particularly lawyers, ime).
So how do you get people into those positions, then?
My objection, as I said above, is to fiat currency -- a medium of exchange that can be debased by the actions of one man, in the system we have right now. The Fed has injected over $64 billion into the US money supply over the last couple of months, which means that the money in your bank account right now is worth that much less than it was three months ago. If the Fed continues to expand the money supply in response to the enormous amount of bad debt generated by the subprime mortgage fiasco, the money you have will continue to be worth less and less. Did the value of the work you did three months ago somehow become less? In terms of absolute value, of course not, but in terms of the medium of exchange we're using, it has, and I don't like that.
I wish I had a good answer to the question of "well, what should money be based on?" It's something I've been wrestling with for about ten years now. Standardising on a particular commodity, such as gold, is tantamount to superstition -- the blind belief that the supply of that commodity will never change. But fiat currency is just as superstitious, and more dangerously so, because its valuation is far more subject to arbitrary change, and the effects of that change are just as far-reaching, and nobody seems to be paying attention.
Our legal system is founded on the principle of checks and balances for the purpose of stability. I've been giving a lot of thought to whether a monetary system could be founded on a similar principle, but I haven't come up with anything I find acceptable yet.
On a grander scheme, I agree, it is a dreadful thing that the way things are set up allows the government to use irresponsible means to bail folks out, especially when their suffering is a result of their own predatory business practices. I know that the result would likely be somewhat catastrophic, but there is some part of me that says 'they took advantage of people's naivite, the lending market is responsible for a lot of people overbuying and losing their homes when their higher payments came due and ruining the credit of lots of people...why /shouldn't/ the people who engineered this crisis pay for it?
I know, it's impractical and would have far-reaching, devastating effects, but...I'd like a little bit of responsibility injected here. The companies that caused this crisis should pay for it, not the world as a whole (because, after all, the US dollar is one of the most widely traded currencies, so if you devalue it you're hurting a lot more than the US, as you noted in your comments about the European injection of 'new' money).
But let's face it, the US is not a country of corporate responsibility, much as some of us would like it to be.
It seems sadly unusual to me that the general public is paying for a failed attempt by large businesses to make more money.
~Blaze
Meanwhile, speaking of recurring expenses, can you confirm one way or the other about whether higher octane gasoline is better for one's car or not? I hear conflicting opinions and so far use the medium grade instead of the lower one because I hear it will extend the life of my car which I am inclined to lengthen as much as possible due to the status of the available other transportation options available where I live in Houston. Certainly longer machine life can be a value one wants. Also, is it also a value to purchase goods from companies that behave in ways we would like rather than ways we would not. If so, perhaps I am not wasting dollars by purchasing almost always at Citgo, the distributor owned by a Venezuelan oil company that distributes substantial revenues back to its low income population.