Like Water for Currency or, Money, Like H2O, Eventually Finds Its Own Level, Which Happens to be a Lot Lower Than What Central Banks Typically Want


Nick Sorrentino of The Liberty and Economics Review puts an Austrian spin on the current recession and its root cause:

If we want to mitigate the business cycle, and by extension the severity of recessions, we must allow money to seek its own value level. Instead of periodic deluges produced by economic kinetic energy pouring over and bursting through Federal Reserve created economic dams , a free flowing currency would instead rise and fall by smaller amounts and in more predictable ways.

Allowing the Fed to arbitrarily set the value of money (even though it is an illusion and always fails) is pure folly. Allowing interest rates to fluctuate freely makes much more sense.

The problem with a free market in currency is that it increases transparency and accountability. These may not be problems for you and me, but they are for people in power.

More here.


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  1. alt-text fail. It’s “werd” not word…jeebus

  2. oh and good morning!

  3. I agree with his premise and proposed policy. But I disagree with this:
    a free flowing currency would instead rise and fall by smaller amounts and in more predictable ways.
    Free markets are better at allocating resources and setting the price of goods and services, including currency. However, they are capable of behaving in highly volatile and unpredictable ways.

    1. He probably should have said “in more rational ways.”

    2. Yeah, since when are market movements predictable? Isn’t part of what got us in the current economic mess that fact that a bunch of quants thought that they could predict where markets were going?

      People saying stuff like that discredit their views no matter how correct they may be.

      1. Not necessarily the predictability is qualified by the “rising and falling by smaller amounts.” It’s easier to accurately speculate where something is going if it isn’t traveling very far to begin with.

        1. Ugh. There’s supposed to be a semicolon after “necessarily”. Gag me with a spoon.

  4. The 2 in H20 is a subscript, not a superscript.

    1. Clearly he is referring to HsquaredO, which is probably some physics equation that isnt immediately obvious to me.

      Hmmm…not plancks constant, that would be a small h. Yeah, Im stumped.

      1. That’s the chemical formula for bong water.

      2. I believe O is generally frowned upon as a variable letter. For obvious reasons.

        However, the sloppy 1’s that look like |’s (such that, absolute value) persist.

      3. ?H?O(n) will give us the change in enthalpy squared times the approximate running time of the algorithm, dude. That’s most likely what Nick was trying to explain.

        1. Outside the thermodynamics ghetto, H stands for effective magnetic field. If I recall my comp sci days, your “big O” is supposed to be in cursive, too.

          1. Magnetic field times running time? That doesn’t make any sense. What would the units be?

            And insisting on cursive is just fucking pedantic.

            1. Without cursive it looks like zero times n, which is too good to be true.

            2. Actually, I shouldn’t talk, since I was just using lowercase ‘o’ to represent the origin in a change of coordinate systems. But I always put a dot in the middle of my zeros to avoid any confusion with o’s.

              1. No, then they just get confused with small cap ?s.

  5. Happy to change super to sub script if someone sends the HTML code for same.

    1. H<sub>2</sub>O


      1. Looks like your posting system filters out the SUB tags attempted by us little people, but I’m sure it will work for you insiders.

        1. You can also copy and paste this: H?O, with no HTML code at all 🙂

          1. technically, that’s not a subscript but rather an ‘bottom-part-of-fraction’.

  6. Free markets flourish where there is less government intervention. When people are allowed to set prices and agree on value for goods and services without having to factor in the cost of money, business taxes, license fees, sales taxes, etc., the value is real.

  7. This article confused money and credit.

    The “value” of money is its purchasing power.

    The price of credit, is the interest rate.

    As best I can tell, he was saying “value of currency” when he meant, “the interest rate,” which is the price of credit.

    The simple Austrian story begins with a given natural interest rate (saving and investment fundamentals) and a given demand to hold money. The quantity of money is assumed to rise. The effects on interest rates and the purchasing power of money are then considered. The interest rate falls in the short run and the purchasing power of money falls in the long run. A lower purchasing power of money is a higher price level. The key to the story is malinvestment–a pattern of production that can’t be maintained. I have skeptical that this malinvestment is serious problem, but the basic analysis is sound.

    But the mistake made by many “lay” Austrians is to fail to understand that the given saving and investment fundamentals and demand to hold money are assumptions and doesn’t mean that in the real world these things don’t change. And so, not every decrease in the market interest rates is caused by an increase in the quantity of money engineered by a central bank.

    Similarly, not every change in the purchasing power of money is due to a change in the quantity of money with a given demand to hold money. The demand to hold money can change.

  8. After trying two ways, I have officially given up.

    1. Thwarted by your own filtering software. How sad. Like the girl being chased by Freddy who couldn’t get out the window because her mom put up bars to keep him out.

    2. Nick, I promise this will work:


      I used Unicode trickery to make it happen…

  9. After trying two ways, I have officially given up.

    Serves you right; threaded comments SUUUUUCK!

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