Topic: Finance, Banking & Monetary Policy

At Cato Unbound: The Private Digital Economy

What if money were private?

One very correct answer is, simply: Money already is private. Sure, there’s the old familiar legal tender of the U.S. government, but the idea of money, and the practices that surround it, are not necessarily tied to the greenback. We all know how money works, and other things can certainly be used in the dollar’s place – if a buyer and a seller agree. From there, if more buyers and sellers agree, the items they use may become a medium of exchange – a class of things held with the intention of passing them along in the market rather than using them directly.

As most of you probably know, that’s exactly what’s happening right now with bitcoin. But is bitcoin sound money? For that matter, what is it that makes a thing sound money? Gold wasn’t sound money just because of its inherent goldiness; it had (and has) distinct, identifiable properties that make it a pretty good money – properties that, say, land, automobiles, or hydrogen conspicuously lack.

How does bitcoin stack up? Will an all-digital private currency one day supplant fiat money? If so, will it be bitcoin or something else? There are alternatives, and some of them are quite successful, albeit less highly publicized in the West. 

Cato’s own Jim Harper discusses these issues in his lead essay for July 2013’s Cato Unbound. Coming up we have essays by Internet security consultant Dan Kaminsky, tech policy analyst Jerry Brito of the Mercatus Center, and Ph.D. candidate Chuck Moulton, who is writing his dissertation on transitions from unsound to relatively sound monetary systems. 

Value of the Syrian Pound Hits an All-Time Low

As I have documented previously, the economic devastation and international sanctions that have accompanied Syria’s civil war have wreaked havoc on the country’s currency, the Syrian pound (SYP). In a desperate, wrong-headed attempt to save its troubled currency, the Assad regime has imposed harsh penalties for currency trading on the black-market. This strategy proved wildly unsuccessful when it was utilized by the Iran in October of 2012.

Indeed, as was the case in Iran, attempts to suppress currency exchange have sparked a panic – a run on the Syrian pound. As of 10 July 2013, the value of the Syrian pound on the black market has hit an all time low, with the current black-market exchange rate now sitting at 295.00 SYP/USD.

As the accompanying chart shows, this has sent the implied monthly inflation rate in Syria skyrocketing.

Yes, Syria’s implied monthly inflation rate is now 91.9%. This means that Syria has exceeded the threshold for hyperinflation (an inflation rate of 50% per month).  Only time will tell if this run on the Syrian pound will continue. But, for the time being, we can be sure that the Syrian pound will remain a troubled currency.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.

Yes, Aid Fuels Tuition Inflation

At this point, I think I’ve said all I need to about the doubling of interest rates on subsidized federal student loans. Basically, the doubling won’t have a big impact one way or another, but putting a little more payment burden on the students consuming higher education is probably a good thing. Why? Because cheap aid encourages students to demand stuff they otherwise wouldn’t, and enables colleges to raise their prices at excessive rates.

That said, since the nation will likely be talking about student aid for a while longer, now is probably a good time to reprint – and expand – the list of empirical studies that have, in one way or another, found that schools in large part capture aid money rather than becoming more affordable. The list probably isn’t exhaustive, and there are many limitations that make it impossible to prove that aid fuels inflation, but combined with the logic that you’ll willingly pay more if you have someone else’s money, these studies show that there is very good reason to conclude that aid is counterproductive:

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Assymetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

 

 

Syria’s Annual Inflation Hits 200%

In an attempt to beat Western sanctions and halt the fall in the Syrian pound, the Assad regime – with the help of Iran, Russia, and China – has begun conducting all of its business in rials, roubles, and renminbi. This decision supplements other existing arrangements between Syria and its allies that are keeping the Syrian economy on life-support. These include transfers of $500 million per month in oil and an unlimited credit line with Tehran for food and oil-product imports.

According to Kadri Jamil, Syria’s prime minister for the economy, this life support is necessary because Syria’s devastated economy is the target of an elaborate plot, hatched by the U.S. and Britain, to “sink the Syrian pound.”

So, what about the sinking pound? As the accompanying chart shows, the Syrian pound has lost 66.2% of its value in the last twelve months.

The rout of the Syrian pound has been widely reported in the press.  But, Syria’s inflation problems that have accompanied the collapse of the pound have gone largely unreported.  That’s because, beyond the occasional bits of anecdotal evidence, there has been nothing to report by way of reliable economic data.

To fill that void, I employ standard techniques to estimate Syrian’s current inflation. Currently, Syria is experiencing an annual inflation rate of 200% (see the accompanying chart).

Indeed, Syria is experiencing a monthly inflation rate of 34%. To facilitate the monitoring of the quickly deteriorating situation in Syria, I am creating a resource which will allow readers to view up-to-date data on the Syrian pound and the country’s inflation problems. Soon, black-market exchange-rate data and ­inflation estimates for countries with troubled currencies like Syria will be made available via the “Troubled Currencies Project” – a joint Cato Institute-Johns Hopkins collaboration under my direction. In consequence, the days of Syria’s plunging pound and raging inflation being covered in a shroud of secrecy are soon coming to an end.

6.8 Day Is Here!

Washington hasn’t passed a new law to avert it, so today’s the day that all of higher education has, it seems, been dreading: The day that interest rates on subsidized federal student loans double, going from 3.4 percent to 6.8 percent.

Hooray?

In the long term, it might actually be good if these rates – which will only affect some federal borrowers – go up. (Congress could still lower them retroactively.) Why? Because federal aid has fueled decades of rampant price inflation, giving basically anyone whom a college would accept – and many colleges will accept anyone – the money necessary to pay sky-high prices. Perhaps the rates rising will dissuade some people from going to college who should be doing something else, or some people going to college who should be there from choosing a more expensive school that offers no better academics but lots of superfluous frills.

That said, the uptick in rates is likely to have little major effect on what people are willing to pay. And to some extent that is as it should be. The average college graduate will earn enough additional money as a result of having a degree that the additional debt is worth taking on. However, roughly half of people who enter college won’t complete their studies, and half of those will earn below the average for whatever piece of paper – some sort of certification or degree – they complete.

Perhaps the most discouraging aspect of all this isn’t the financial impact of the doubling, but that Congress couldn’t get a deal done. If you are going to have federal student loans, it makes sense to peg them to interest rates such as those of the 10-year Treasury Bond rather than having Congress fix a number for several years. At least then they will fluctuate with the overall time value of money. Indeed, that concept was sufficiently agreeable that President Obama proposed such an idea, and the Republican-controlled House passed roughly similar legislation. But, in a surprise move, President Obama threatened to veto the legislation without, it seems, any effort to negotiate with House leaders first, and Democratic Senate leaders called mainly for freezing rates at 3.4 percent until they could reauthorize the Higher Education Act. There was even a bipartisan effort in the Senate to push through a bill similar to the House measure and the president’s, but it went nowhere. 

Why the breakdown? It’s hard to know exactly, but easy to see a suspect: politicians, especially Senate Democrats and to a lesser extent the president, didn’t want to do anything that didn’t appear to give students the cheapest loans possible. That’s bad news for any future compromise, but much more importantly, a clear and troubling sign of why, barring loud public outcry, we won’t get the long-term solution we need: phasing out federal student aid to force students and colleges to demand and furnish efficient, effective higher education.

Service to the American People or to the American State?

One of the most persistent utopian visions over the last century and more is national service. By “national service” proponents never mean service to Americans. The United States long has been famous for the willingness of its people to organize to help one another and respond to social problems. Alexis de Tocqueville cited this activism as one of the hallmarks of the early American republic.

Rather, advocates of “national service” mean service to the state. To be sure, they believe the American people would benefit. But informal, decentralized, private service doesn’t count.

The latest proponent is columnist Michael Gerson, one-time speechwriter for “compassionate conservative” George W. Bush. Wrote Gerson:

How then does a democracy cultivate civic responsibility and shared identity? Taxation allows us to fund common purposes, but it does not provide common experiences. A rite of passage in which young people — rich and poor, liberal and conservative, of every racial background — work side by side to address public problems would create, at least, a vivid, lifelong memory of shared national purpose.

To Gerson’s credit, he does not advocate a mandatory program, where people would go to jail if they didn’t desire to share the national purpose exalted by their betters. But many people, from Margaret Mead to Senator Ted Kennedy, did want a civilian draft. Indeed, a number of noted liberals who campaigned against military conscription were only too happy to force the young into civilian “service.” 

Committee Issues Excuse to Keep Doing Wrong Thing

Today, the Democratic staff of Congress’s Joint Economic Committee released a report which seems mainly to be an excuse to keep doing the wrong things.

The basic tenets of the report certainly feel sensible: People with more education tend to have greater skills and earn more, but the ever-inflating price of college saddles people pursuing education with bigger and bigger debts. The solutions? Keep subsidized federal loan rates frozen at 3.4 percent, greatly expand loan forgiveness, and convert private loans into federal loans. Basically, more cheap aid—exactly the wrong thing.

The fundamental problem with the report is the fundamental problem with federal aid in microcosm: It ignores the crippling, self-defeating, unintended consequences of aid. You know: The downsides of federal “help.”

First and foremost, federal aid furnishes jet fuel for tuition inflation, both by allowing people to demand more than they otherwise would, and by enabling schools to raise prices knowing students will be able to pay them. It also encourages millions of people to enroll in college who, for many reasons, have little prospect of finishing. That’s why roughly one out of every two people who enter a postsecondary program don’t finish. Finally, it powers over-credentialing, with about a third of people with bachelor’s degrees in jobs not requiring them, and many jobs that require the degree likely doing so for basic signaling reasons—e.g., the person has some basic stick-to-it-iveness—rather than indicating that they possess useful skills or abilities they obtained in college.

A reasonable reading of the data forces one to conclude that Washington should markedly reduce its presence in college—indeed, get out altogether—rather than perpetuate bad policy. Which is likely why policymakers seem to assiduously avoid reasonable readings—or any readings at all—of important data.

Cross-posted at seethruedu.com