Hugo Chavez, cryptocapitalist
I am not the world's biggest fan of Hugo Chavez, but sometimes, the dude comes up with some really good ideas. I don't agree with his blanket-condemnation sentiments about capitalism -- they make more sense interpreted as a slam against mercantilism, the belief that a nation's power depends on its supply of capital -- but bartering goods and services for oil is a perfectly sensible idea. In fact, in a world of fiat currency, where the money supply expands and contracts (mostly expands, these days) at the whims of governments and the individuals who keep them in power, barter is a better measure of value than money is.
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 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.
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 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.