Debt ceiling, the euro, the economy

So, I guess liberals are supposed to be really upset about the debt ceiling deal that came out of last weekend to be voted on today/tomorrow. Dave Weigel has a guide to debt deal denunciations while Jonathan Bernstein explains liberal bitterness over the deal. But I don't see what the fuss is about.

In the beginning, President Obama wanted a grand bargain for $4 trillion in debt reduction over 10 years along with some small revenue increases. This deal doesn't have the revenue increases, but the spending cuts are also much less than in the grand bargain. The core of the cuts are something that would have been there regardless of whether or not there were revenue increases; the revenue increases were in there to sweeten the pot for even more spending cuts. The deal convenes a deficit commission that is very likely to pass through some revenue increases, or otherwise trigger automatic spending cuts that are mostly defense spending cuts. And defense spending should be cut at every possible chance: the US spends more on the military now than at any point during the height of the Cold War. See this graph from the Center for American Progress (or this one from the Heritage Foundation). The debt ceiling issue was a stupid, fake problem that only became a real economic issue through political hostage-taking over spending. It could impact the economy in several ways: by forcing a protracted government shutdown or austerity during a time of economic weakness that, by reducing government spending, reduces GDP and provokes a recession; by increassing the cost of financing government debt through a downgrade by the ratings agencies; through a (very unlikely) technical default; or via financial panic caused by any of that. All of these were overblown: only one of the three ratings agencies was ever threatening to downgrade US debt (all such companies have lost credibility following the mortgage crisis debacle, and the market prices of US debt, which are what actually matter, are fine). But the spending cuts in the debt ceiling deal are strongly weighted to 2013 and later, giving only a direct 0.04-0.4% drag to GDP. That's not great, but not apocalyptic absent other problems.

Meanwhile, the US economy is on pins and needles, since there was never a recovery from the last recession. Demand is weak, GDP is well below potential output, and employment never recovered, leading to a seemingly-permanent decline in trend GDP and the employment/population ratio. After the end of monetary stimulus in QE2, the softening economic numbers seem to be headed back towards recession.

And the really worrying problem continues to be the Eurozone. The deal announced July 22 to finally bring Greece into technical default, seems to have helped Greece, Ireland, and Portugal, but the Eurofail seems to be infecting Spain and Italy as badly as ever. As US manufacturing hit its lowest level in two years, the Eurozone is still collapsing.

It looks like the Italy-Germany bond spread is 2011's TED spread, but Spanish 10-year bonds are another measure of contagion.

Coin hoarding, Gresham's Law, and base metals

Argentina's weird coin shortage got some press back in 2008 and 2009, and it continues into 2010. Some suspected hoarders or melters when inflation was at 25%, and led small businesses to give change in mints or candy.

Where are Argentina's coins? (Global Post, 2009-05-11):

The coin scarcity has created a strange predicament: Merchants regularly refuse to sell their goods or services if it means they’ll have to give coins back as change. For small transactions, they’d rather lose the revenue than spare the change. ...Many of the banks are as loath to let go of their coins as the small businesses are.

...The cause of the coin scarcity isn’t clear. The Central Bank says it’s supplying enough: a record 524 million new coins in 2008, up 13 percent from 2007. This year will likely bring a new record, and there are supposedly 5 billion Argentine coins currently in circulation — about 125 per person.

Many blame coin hoarders and black-marketeers, several of whom have been caught. But they seem to be effects, rather than causes, of the shortage. Another scapegoat is the city buses, which until now have only accepted coins.

...The shortage might have been precipitated by the rise in commodity prices in the last few years, said Dardo Ferrer, chief economist at the Market Foundation. There have been reports of people inside Argentina and across its borders melting coins for their metal, which became worth more than coins's face value when the price of raw materials rose.

Coin hoarding and melting were common in an earlier age, when money derived most of its value from the intrinsic value of the metal, James Surowiecki explains:

Hoarding of this sort, and the resulting coin shortages, was once a recurring economic problem, one that the Italian economic historian Carlo Cipolla dubbed “the big problem of small change.” But these shortages were thought to be a feature of premodern times, when coins were made out of precious metal, and people literally brought silver to the mint to have it turned into coins. If the value of silver rose beyond the face value of coins, hoarding silver was a natural response. Today, coins are government-issued tokens, and their value is theoretically unconnected to the metal they contain.

This isn’t to say that the material worth of a coin’s metal can’t still exceed its face value; the rising value of zinc, for instance, meant that, last year, every new penny issued cost the U.S. Mint about 1.7 cents. But hoarding no longer makes sense unless it’s done on a large scale, and most people in Buenos Aires are not melting down their coins into hunks of copper.

Gresham's law implies that coins with a lower intrinsic value will replace coins with a higher intrinsic value if the nominal value of the coins remains the same. A lot of this happened in the 1960s and 1970s, when the U.S. shifted to a true fiat currency and started minting dimes (and other coins) in a copper-nickel alloy rather than silver. Numismatists shifted through change for decades to collect all the silver dimes and remove them from circulation. According to Coinflation.com, the intrinsic value of a silver Mercury or pre-1964 Roosevelt dime is US$1.59, although the face value remains US$0.10.

So, how likely is it that hoarders are (or were) melting down the coins of Argentina for a profit? The Central Bank of Argentina's Web site is a little strangely laid out, but has useful information about the coins. Most of Argentina's coins are minted in aluminum bronze or cupronickel, and some of them have a brass-plated steel variant. Let's look at three of them: the aluminum bronze 50-centavo coin, the aluminum bronze 25-centavo coin, and the cupronickel 25-centavo coin. Since there are no brass-plated steel variants, these would be among the easiest to collect and melt down.

• The 50-centavo coin weighs 5.8 grams, and is composed of 92% copper and 8% aluminum. The metal in each coin is thus worth US$0.044. The nominal value of 50 centavos is US$0.12.
• The aluminum bronze 25-centavo coin weighs 5.4 grams, and is composed of 92% copper and 8% aluminum. The metal in each coin is thus worth US$0.04. The nominal value of 25 centavos is US$0.063.
• The cupronickel 25-centavo coin weighs 6.1 grams, and is composed of 75% copper and 25% nickel. The metal in each coin is thus worth $0.072. The nominal value of 25 centavos is US$0.063.

Only the cupronickel coin has greater intrinsic value than face value. But Argentina, like the U.S., has a penny problem. Both of the 1-centavo coins are worth more than US$0.01 for the copper, while the face value of the coin is only worth a quarter of a U.S. cent. Argentine pennies are worth nearly four times as much for their metal as for their face value. Melting may make economic sense with the 1-centavo coin, and possibly others. But if melting was the culprit, it seems like steel coins would eventually make their way into circulation. Or perhaps, having gotten swept up in a hoarding dynamic, hoarders can profitably sell even steel coins, which helps maintain the hoarding behavior.

However, there have been at least some cases where it is known that people have been melting down base metal coins to use as a raw material.

Sharp practice of melting coins (BBC, 2007-06-26):

Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades. And that's creating an acute shortage of coins in many parts of India, officials say.

Police in Calcutta say that the recent arrest of a grocer highlights the extent of the problem. They seized what they said was a huge coin-melting unit which he was operating in a run-down shack.

The grocer confessed to melting down tens of thousands of Indian coins into razor blades which were then smuggled into Bangladesh, police said.

"Our one rupee coin is in fact worth 35 rupees, because we make five to seven blades out of them," the grocer allegedly told the police. "Bangladeshi smugglers take delivery of the blades at regular intervals."

This was three years ago, and prices have changed since 2007, but a quick comparison at contemporary prices may be interesting. According to the Royal Bank of India, all currently-minted Indian coins are minted in stainless steel. The old two- and five-rupee coins were cupronickel. Assuming a 75% copper/25% nickel alloy, the metal in the old six-gram two-rupee coin would be worth approximately US$0.07, while one nominal rupee is worth US$0.02 at current exchange rates. So it's entirely plausible that hoarders were melting the coins for copper and nickel. It seems like steel prices would have to be higher for the metal for the new 5.62-gram stainless steel two-rupee coin to be worth more than the face value of the coin, but perhaps Bangladeshi melters have additional costs to obtain raw materials otherwise.

Dave Arneson has died

D&D co-creater Dave Arneson has died.

I saw him a few times at GenCon, and heard him lecture there the first year I went. I hope they have a moment of silence for Arneson this year.

I realize that my post on gold pieces and US dollars didn't include the prices of goods at 2001 gold prices, which were more typical of recent decades. If you use the 2001 gold prices, a longsword would cost $1,166; a +1 longsword about $100,000; a backpack $155; a vial of ink $622; a day of trail rations $6.40; a light riding horse $5,800; and a skilled 1st-level commoner would earn $8k a year. Raising the dead would cost a half-million dollars, and a cure light wounds potion would be worth almost four thousand dollars.

By way of contrast, a MRE costs about five to seven dollars retail. According to some recent Googling, prices for a Beretta 92FS run about $550; a semiautomatic civilian Colt AR-15 about $1,200; and an automatic, legally transferrable M-16 about $15-25k. However, even a fully-automatic firearm has no chance of hitting the incorporeal undead without a wizard on hand to cast magic weapon.

Gold pieces & US dollars ...back when there were dragons

It's surprisingly easy to convert between US dollars or other contemporary currency and the currency of D&D and d20 games. The currency of D&D is a fixed weight of metal, in which gold, silver, and copper are convertible between each other at a rate of 10:1. One hundred copper pieces are worth 10 silver or 1 gold.

The measures are a little confusing, because while gold and silver are priced in troy ounces, copper is priced in standard avoirdupois pounds. But in troy, avoirdupois, and apothecaries measures, a grain is a grain is a grain. One troy ounce is 480 grains and one avoirdupois pound is 7000 grains.

Since in D&D there are 50 coins to the pound, each coin weighs 140 grains. That's very slightly more than 9.07 grams, or just less than 1/3 of an ounce (for comparison, a Sacagawea dollar weighs 8.1 grams; four dimes are about 9 g). Get the spot prices for gold, silver, and copper, from Kitco.com, and plug it all into a spreadsheet. Official coinage is somewhat more valuable than scrap and bullion, because it carries official authenticity, has numismatic value, and is scarcer. But the spot price sets its intrinsic value.

Last Friday (February 27, 2009), gold cost $939.60/oz, silver cost $13.23/oz, and copper cost $1.51/lb. So a d20 gold piece is worth $274.05, a silver piece is worth $3.86, and a copper $0.03.

Today's levels are the result of a decade-long runup in commodity prices, which persists for precious metals; older prices are a little more typical. On June 1, 2001, gold was $266.70/oz; silver was $4.58/oz; and copper was $0.745/lb. This means that a d20 gold piece was worth $77.79, a silver piece was worth $1.28, and a copper piece was worth a penny.

Since the d20 system uses standard equipment prices, it's simple to compare game prices to contemporary real ones. A longsword costs 15 gp, or $4,110.75 in today's money; a +1 longsword costs more than a quarter million dollars. A 2-gp backpack costs $548.10, a vial of ink costs $2,192.40, a fishhook costs $3.86, and a day's worth of trail rations is $19.29. A donkey costs as much as a vial of ink, a light riding horse costs $20,553.75, and a pig is worth about eight hundred dollars. An ordinary, skilled 1st-level commoner earns nearly $30k/year. Raising someone from the dead, a spellcasting service too expensive to be generally available, would cost at least $1.49 million, while removing a negative level would merely cost about a hundred thousand dollars.

The currency of Rome, by contrast, used a multi-metal standard. After the currency reforms of Augustus Caesar, the gold aureus was worth 25 silver denarii, 100 bronze sestercii, or 400 copper ases. The bronze sestercii weighed about 25-28 g. The silver denarius weighed about 3.9 g (about $1.66 of silver), and served as the backbone of Roman finance. Roman prices and currency varied greatly.

A century ago, the US used a silver dollar, a coin with 24.057 g actual silver weight. That specie is worth $10.23 in today's money, but an inflation calculator will show that a 1909 dollar is can buy $22.81 worth of goods in 2007 dollars. The word dollar comes from the Austrian "thaler," a Bohemian coin originally minted in 1518. The actual American dollar comes from the Spanish reales de ocho, the piece of eight, which Spain had shipped by the galleon-full from its rich silver mines in Mexico and Peru. At the time of the American Revolution, the states had no currency of their own, and approved the pieces of eight for American commerce until a dollar with the same value could be established. The eight reales coin was often cut into eight bits for change: two bits was thus equivalent to a quarter dollar. The New York Stock Exchange traded in eighths and sixteenths of a dollar until as late as 2001.

Of course, comparing prices between historical periods, much less fantasy worlds, is misleading. Agatha Christie expected to never be rich enough to buy a car, but never too poor to be without servants. And mass production and economic development has made things much, much more affordable, as Brad DeLong notes:

Our goods are not only plentiful but cheap. I am a book addict. Yet even I am fighting hard to spend as great a share of my income on books as Adam Smith did in his day. Back on March 9, 1776 Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nations went on sale for the price of 1.8 pounds sterling at a time when the median family made perhaps 30 pounds a year. That one book (admittedly a big book and an expensive one) cost six percent of the median family's annual income. In the United States today, median family income is $50,000 a year and Smith's Wealth of Nations costs $7.95 at Amazon (in the Bantam Classics edition). The 18th Century British family could buy 17 copies of the Wealth of Nations out of its annual income. The American family in 2009 can buy 6,000 copies: a multiplication factor of 350.



Books are not an exceptional category. Today, buttermilk-fried petrale sole with pickled vegetables and parsley mayonnaise, served at Chez Panisse Café, costs the same share of a day-laborer's earnings as the raw ingredients for two big bowls of oatmeal did in the 18th Century. ...Today we still spend about one dollar in five on food—down from the half of income that Americans spent in 1776. The share hasn't fallen more because some of us buy buttermilk-fried petrale sole with pickled vegetables and parsley mayonnaise cooked, served, and cleaned up by others rather than (or in addition to) oats in the gunnysack. One reason is that the oats-for-five-meals-out-of-six-diet of 18th Century Scots was monotonous, and we are glad to escape it.