Monday, April 30, 2007

Risky Business

I have been reading

A note from Menzie Chin on the Forward Premium Puzzle

The afore mentioned If Exchange Rates Are Random Walks, Then Almost
Everything We Say about Monetary Policy is Wrong


Bernanke and Gerler's Inside the Black Box: The Credit Channel of Monetary Policy Transmission

Rereading Mankiw's Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

and am reminded of Peter Flanigan quip “There is no such thing as scarcity and no such thing as surplus. There is only price.”

Price is the orchestrating mechanism of our entire economy, of our very survival. Inside of it is carried all of the information needed to coordinate the world's work. With that comes all of the world's uncertainty.

When a mother in the western world puts her daughter to bed at night she is not afraid that there will be no milk in the morning, that there will be no place to live, no way to get medicine.

She is worried that the price of milk and housing and medicine, will exceed the price of the labor she wants to trade for it. In the modern world much of our fear can be summed up in a single phrase "That wasn't the price/wage/cost/revenue I was expecting"

Perhaps it is practically impossible to insure against real fluctuations in price without insuring against nominal ones.

Update: I have just started Money in A Theory of Banking and it looks very interesting.

12 comments:

happyjuggler0 said...

I agree that if something exists in the world, then it is wrong to say that it is scarce. The accurate statement is that it is scarce at a price, and above that price it is no longer scarce, noting that a price might take a nonmonetary form.

But no such thing as a surplus? How about dirt? How about ocean water? If the price is zero and still no one wants it....

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