Wednesday, December 5, 2012

Low Taxes, Stable Money

Forbes has some advice on the economy: low taxes, stable money.

The United States was founded on the principles of the Magic Formula. Until the introduction of the income tax in 1913, taxation was almost nonexistent. The principle of a gold-based currency was defined in the Constitution. The result was magical: the United States was the most successful country of the 19th and 20th centuries.

Just so. And then goes on to explain...

Today, the Magic Formula is best exemplified by Hong Kong and Singapore. Both have very modest tax rates. Both provide a full spectrum of government services, including universal healthcare. Both adhere to the principle of Stable Money. They don’t use a gold standard – that would introduce an intolerable degree of instability of exchange rates and the conditions of trade – but they have a policy of maintaining their currencies’ value at a stable and predictable level with major international currencies.

In Hong Kong, this is done by way of a currency board arrangement with the dollar. In Singapore, it is done by way of a currency-board-like arrangement with a basket of major currencies. The result is that both governments abandon any significant form of discretionary “domestic monetary policy”.

Yes, Hong Kong has a stable money supply, because yes Hong Kong allows only private companies ot issue the currency.  (Money is still gold.) Those private companies realize the 800 pound gorilla is USA, and that although the system is rotten, it is tradable.  So Hong Kong has private business has elected to have a temporary system that takes advantage of foolish USA policies.  George Soros, currency manipulator extraordinaire, say his job is to exploit foolish government policies.  Just so.

Hong Kong is on a gold standard for money, but it is also taking advantage of the other side of the currency bet that USA has placed.  We need to see how things are so we can plan accordingly.

Feel free to forward this by email to three of your friends.


Anonymous said...

from wiki:

The currency board system ensures that Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate.

So how stable is the HK dollar really if it is tied to the US dollar? Is wiki accurate?

John Wiley Spiers said...

it is tricky, but the question is how stable are the private banks who are playing the hand they are dealt? Those bank can one morning eliminate the Hong Kong dollar form their inventory and replace it with gold dollars. Right now, given the world economy, they are playing their hand a certain way. They are small and maneuverable, and making money off the USA policy, as it is. For now.