From: pmetzger@snark.shearson.com (Perry E. Metzger)
Subject: Re: Keyenes VS Hayek
Organization: /usr/local/lib/news/organization
Date: Mon, 23 Nov 1992 20:46:05 GMT

Chris.Holt@newcastle.ac.uk (Chris Holt) writes:
>pmetzger@snark.shearson.com (Perry E. Metzger) writes:
>
>[about why stable currency can prevent business cycles]
>>Well, I don't have a Hayekian proof, but I can sketch a part of the
>>argument from George Selgin's book on free banking. Selgin is an
>>Austrian schooler, so it should be close enough. Basically, the
>>problem is that a central bank has no way to track the supply and
>>demand for currency in a market driven way. In a pure free banking
>>system, the excess clearing rule (did I have the name of that one
>>right) more or less dictates that banks end up following a strict
>>market discipline in setting their reserve capital percentages, which
>>means that the money supply and interest rates will rise and fall in
>>close couplings with the demand for currency.
>
>It would seem an important question here is just how close the couplings
>are.

Historical examples of free banking, like the Scottish experience,
seem to indicate that the problems are minimal.

> Certainly with exchange rates, the punters continually overshoot
>and move together in a kind of lemming fashion.

Spoken like a man who's never been on the inside of a trading house,
let alone knows anything about the forex markets.  The foreign
exchange markets are some of the most liquid and efficient in the
world -- the "punters" don't "overshoot" or "move together in a
lemming fashion". If you look at the markets, they are EXTRAORDINARILY
stable. Remember, forex markets trade over $1 Trillion per day -- no
one group can influence the market much, and no horribly glacial
shifts ever arise. What DOES happen is that governments try to control
the market on occassion and get heavily screwed in so doing.

>What reason is there to think that either this wouldn't happen in a
>"free" system, or that the overshoots would be better than the errors
>we all know governments make?

What overshoots? The forex market is free for all intents and purposes
-- there is practically no government regulation of it, and it works
quite well. I suspect you are going to say that you don't like some of
the resulting prices in that market. Well, so what? I imagine you
don't like the fact that you aren't a billionare, either.

>Control theory generally requires damping factors on feedback loops;
>if the economic equivalent isn't to be found in a regulatory
>mechanism, how does it arise?

I was under the impression losing your shirt was a sufficient damping
mechanism.

More seriously, I suspect Mr. Holt is about to make some spurious
claims about the "wild gyrations" in the forex market, and how they
are "unrelated to the trading of goods and services". The "wild
gyrations" are hardly that wild -- they just aren't what government
central planners would like. And as for goods and services, they are
only a fraction of the trading volume -- people arbitraging
international financial instrument interest rates and the like is of
far more consequence. It should not be suprising to the central
planners that people wanted German Marks, with their strength and high
interest rates, a lot more than they wanted Brittish Pounds. When DM
interest rates rose relative to those in the UK, the Mark rose and
Sterling fell. Big deal.

--
Perry Metzger		pmetzger@shearson.com
--
"They can have my RSA key when they pry it from my cold dead fingers."
Libertarian Party info: Phone 1-800-682-1776, E-Mail 345-5647@mcimail.com
Newsgroups: alt.politics.economics