Dollar Hegemony

There’s a funny irony in the whole “dollar hegemony” story one sometimes hears.

Going back to the closing of the gold window during Nixon administration, and even before that, the argument is that the West and Japan propped up the dollar as tribute to the emperor, in exchange for implied security guarantees. Foreigners were overpaying for “worthless paper”, and Charles De Gaulle may have hated that (espcially when Americans used the paper thus propped to buy up French firms), but they were spending to save a status quo threatened by Soviet domination. They were purchasing American military and economic strength, because they depended on a strong America. The United States wasn’t putting a gun to their heads to pay up. The Soviet Union was.

Now here’s China, the newest of US dollar purchasers. I’d argue that among other things, what China is purchasing with its overpayment for US securities is American military and economic weakness. China’s undervalued currency contributes to the “hollowing of smokestack America”, and a postindustrial United States, with disruptable global supply chains and limited capacity for vertically integrated domestic military production, is a less formidable rival than Rosie the Riveter’s America.

Please note that this is not an anti-China post. I don’t think that China’s currency policy is primarily driven by geopolitical rivalry, it is mostly about economics and development. I just think when the costs and benefits are summed, changes in the sectoral composition of America’s economy enter into the benefits column. Nor do I think this is condemnable on China’s part. In fact it is admirable. Managing geopolitical rivalries are part of what governments do. One ought not condemn the government that does its job well, but the one which for all its bluster manages its situation poorly.

This is cross-posted as a comment to a post of Brad Setser’s.

Fecundity Indexing: Childrearing and Public Pensions

This was originally a comment to a post on The Volokh Conspiracy. It’s resurrected here in response to a post by Shannon Love, and because I think this is really an important, if rather obvious, idea. [via Instapundit]

Public pension systems should offer tiered benefits explicitly contingent upon the number of children a couple has had, but with the extra benefits not kicking-in until at least 20 years after a child was born. Lots of variations on this theme are possible (extra benefits to parents of the educationally successful, etc.), though there is a slippery slope to overintrusive social engineering.

This idea has the advantage that it offers an incentive to reproduce that is likely to disproportionally affect those well prepared to raise a child. An impulsive teen whose failure to use birth control leads to a pregnancy is unlikely to be swayed in her choice of whether to have the child by an incentive 40 years distant. But a distant incentive may well affect the decision of successful couples, already socking away funds in their IRAs an 401-Ks, and whose decision to have very few children is related to conscientiousness in managing their finances.

Aside from addressing broad perverse incentives against childrearing, fecundity-indexed public pensions would help counter the growing insolvency of social insurance programs. Any private pension manager knows that it is important to match the assets and liabilities of her fund, in terms of both quantity and timing of payoff. A private pension manager buys bonds as long-term, liability matching assets. But with a social insurance programs, owing to their scales, financial assets may become meaningless. If a society fails to produce real assets sufficent to support the aged, any bonds the social insurance program has become claims on stale air. The real asset that social insurance programs rely on is productive young workers. A social insurance program that wants to match assets to its liabilities ought to be encouraging the reproduction of successful wealth creators.

Update History:
  • 11-Mar-2006, 12:15 p.m. EET: Reworked awkward first sentence of last paragraph.
  • 11-Mar-2006, 1:15 p.m. EET: Changed title from “Public Pensions and Childrearing: A Proposal”

Money, valuation, and financial innovation

Summary: I claim that financial innovation has coupled the real economy to asset valuations more tightly than in the past. This coupling results from an increase in the liquidity of many assets, which has led to genuine growth, and is mostly a good thing. But the downside is a much higher cost to errors and volatility in the valuation of assets, as asset write-downs feed directly into contractions of nominal GDP.

The argument is based on a thought-experiment substitute for traditional monetary aggregates, which I think yields useful insights (and is inspired by a conversation with HZ in the comments to a previous post).

If I were to make up Steve’s estimate of the money supply, it would look something like this…

Budapest and the shape of a tongue in exile

It would be hard for an expatriate not to love a book whose first line is

It should be against the law to mock someone who tries his luck in a foreign language.

So begins Budapest, by Chico Barque, delightful in English translation from the Brazilian Portuguese about an invisible man of letters who falls in love with the Hungarian language.

The price of noodles in China: A parable of inflation & deflation

I originally posted this story to the very nice I’ll try to write for them regularly, and will cross-post my contributions here.

China gets a lot of attention for its policy of keeping its currency cheap with respect to other countries’ money largely by printing local cash to buy up foreign exchange. Usually when countries ramp up the printing press in support of some state policy or another, the result is high inflation. Not so in China, which — so far — has been expanding its money supply at a heady clip with only very moderate inflation. But perhaps this story in today’s New York Times is the canary in the coal mine?

Noodle Prices Rise, Along With Chinese Tempers

…So in February, as noodle patrons across the city arrived for their morning fix, an unexpected notice awaited them: The price of a bowl of Lanzhou pulled beef noodles was going up. A large bowl, once only 27 cents, would now cost almost 31 cents… “Beef Noodle Price Hike Touches Off Nerves Everywhere!” declared The Western Economic Daily, a feisty local paper.

But, wait a minute, not so fast…

Money and debt

What is money? Much more on that soon, it gets to the heart of what I am thinking about these days, and what I hope to write about on these pages. I think we’re about to have something of a crisis with respect to the meaning of money, and that the resolution of this should not be old bromides like the gold standard, but something completely different.

In the meantime, on Brad Setser’s wonderful blog of which I’m a breathless groupie, regular commenters HZ and DF touched upon the question. I wrote a long response, then decided it wasn’t really appropriate to Brad’s comments, as my response was long and has nothing to do with Brad’s main post. So, I’ll put my mini-essay here, as a teaser for the much more that is to come on the subject.


In Baltimore, it’s morning, but I’m not in Baltimore. It’s 1:30 pm here in Constanta, at the edge of darkness, or at least the Black Sea, and I having a lazy beginning to a day which, after all, still has an agenda. My finacée, R—, has not been feeling well. We stayed in bed together this morning, and after a while we both felt better. There are consolations to this gypsy’s life I’ve made for myself.

But it gets to me, it always gets to me, and I must go and try to hawk my family’s “villa”. Somewhere, there must be the perfect trading company or somesuch that would love to make a home of the finest office space in Constanta, at the very heart of the city with original hardwood floors and spectacular views of the beach. My charge has remained vacant 5 months, and I am embarrassed. Oh, dear reader, you wouldn’t happen to be a multinational businessperson expanding into Central Europe? Oh well. I thought not.

To the realtors’ offices then, to put a fire under all their asses. I am one to talk, here in bed and it’s going on 2 pm, but I have no great impression of the work ethic of the Constantan realtor. Of course they preen with the status symbols of the age, the long, dark coats and gleaming silver mobile phones, but it seems to me they put up ads and wait for phone calls, and atata tot — that’s all. It’s not enough, of course. So I will make myself much pushier.

R— is in the bathroom, primping and powdering herself in long rituals. She will never be persuaded, though I have tried, I have, that all this work is entirely unnecessary. So I wait my turn, to use the can, take a quick shower, then off we go, to lunch, to the realtors.


When I was a child, I was told that I was a good writer. That always seemed to me like a mixed blessing, because writing is something that mostly I did out of obligation, for school or for some other purpose. There were those times when I wrote because I wished to write. But those were usually times when something was wrong.

Interfluidity is born at a moment where I feel a spontaneous desire, perhaps even some desperation, to write. Now as it was always, I am provoked into writing because something is wrong.

Something is not flowing. Something is blocked. At one level, this is something akin to writers’ block. But it is goes beyond that, because it was never my ambition to be a writer, exactly. At a broad level, I feel I have something to contribute, there is something that I’m supposed to do or have done, and I’ve not succeeded in doing it. Interfluidity is my attempt somehow to flow, to get all the things I am thinking and trying out there, even on a page made of electrons and other peoples’ eyes.

I’m skeptical of myself these days. My recent track record has not been one of success. There are a thousand projects started and never quite completed. (This is my second blog, here’s the first.) I’ve taken foolish risks financially, and therefore foolish losses. I’ve tried, so far without success, to reintegrate myself into the academic world. I’m feeling closed-in, stuck, at a loss. So here’s a new page, upon which I will try yet again to flow.

I am not a humble person. There are things I have to contribute that could really matter, that could be revolutionary even. But so long as it all remains closed-up in the hollow cavity of my skull, who gives a shit? Interfluidity.

New Beginnings

This is a placeholder, some words, forgettable, regrettable, as I’ve nothing to do or to say but to try to get the look right, the graphics up, all that jazz.

But it is also I suppose a new beginning, to something, a forgetting of escapades and failures past, a clean path to new misadventures. Let’s see where it goes.