[I have to begin this ramble with an apology. It is long and not as tightly written and dense as the prose you have come to expect here ;-) I’m really posting it as a future reference for discussing the fiscal fiascos spreading over Europe and starting here at a capitol near you.]
The storage and exchange of retained wealth has been a long time interest of mine. Here I’d like to just wander around some random thoughts on the subject. Please excuse the lack of structure to the ideas and beliefs that are rolled out.
But before starting, a detour to some related reports. Many of us on the Right have been saying for years that SS is totally unfunded, there is no “trust fund” that can legitimately be called that. Now that national debt and unfunded liabilities have been raised in the country’s consciousness, especially in its Left lobe where this has been denied for years, it was refreshing to hear Congressman Peter Defazio (D-OR) state last week on Fox News that “there is no Social Security trust fund” with any money in it. And this especially in the sense of money that I’ll talk about here. The Congressman was emphatic that SS is instead “the largest creditor of the United States”, having lent the federal government $2,600,000,000,000 (that’s like in trillion).
Last Friday I was at Tea Party Patriots meeting with Mark Meckler (TPP co-founder) and a few others (big problem, we were wondering how to spend all those oil company and Koch brothers’ checks) when Mark confirmed that the congressional select committee on deficit reductions was not only a distraction, pabulum, and entertainment (as characterized on RR), but specifically it was Kabuki theater designed to fail. And that we should all keep focused on real deficit reductions and not the piddling amounts being dangled in front of the sheeple. He re-emphasized that this Congress cannot commit or compel future Congresses to do anything. All they can and should be held to do is make their own deficit cuts before the next Congress is sworn in (or at) in January 2013. (But then, all RR readers already knew that.)
OK, onward. Money, we are told, is anything that is accepted as payment for goods and services, and also repayment of debts. The three functions of money are 1) medium of exchange, 2) unit of account, and 3) store of value (i.e. wealth). It’s the last that I want to dwell on in the sequel. The money supply of an economy today consists of currency (banknotes and coins) and so-called “bank money”. The latter is in the form of little ones and zeros spinning on a disk somewhere, and that’s all.
Back in the olden days, wealth was stored in the form of real stuff that you could stub your toe on – be it land, cattle, precious metals, crops, buildings, … . This made it tough to do business and build more wealth, because you had to haul and trade (barter) big things whose value was usually in dispute. And the local big guy (government) couldn’t get in there and take out his tribute very conveniently. But when you had wealth, you knew you had something(s) indelible and certain. Enter commodity money.
The big guys immediately saw additional benefits in their people using such money, and soon got into the business of being the only ones allowed to manufacture and issue it with, of course, their mug shots on it. The benefit they came upon quickly was that commodity money based on precious metals could be debased, i.e. they could steal from the people without having riots in the streets from raising taxes too high.
The problem was that the people soon caught on and demanded more of the debased shekels for a loaf of bread, and inflation was invented. But once a kingdom or empire started debasing, it got hooked on the ease of it, and kept doing it until it spent itself broke, and the Visigoths or their moral equivalents came in over the walls to rape, pillage, and burn. Almost every kingdom and great empire went to their doom down this path.
Somewhere along the way after printing was invented, a brilliant banker (they were called money lenders then) came up with the idea of issuing specially printed receipts for the commodity money people had him store. Now they didn’t even have to haul around heavy bags and purses any more. If you trusted the banker, you would now accept the receipt or bearer bond for a certain amount of precious metal that had some hard-to-replicate fancy printing on it with the banker’s name. Of course, the banker immediately figured out that he could start making loans to other people on the stuff in his strong room by issuing more of those printed pieces of paper. And voila, paper money was born along with lending at interest.
The real heavy stuff in the strong room never had to move very much or often; what moved around the economy was these pieces of paper money that everyone knew you could take to a given banker and withdraw a sack of the real stuff. Lots of banks came into being, each issuing their own ‘bank notes’, and commerce boomed because everyone knew how many ‘ounces’ of the real stuff a shekel or drachma or kroner was worth. And all that changed hands were pieces of paper money, which itself became valuable enough to store in safe places because, after all, you could always trade it in for the real thing.
The astute reader will have noticed that I slipped in there ‘kroner’ or crown. Yep, now kingdoms began noticing how much fun and profit the bankers were having, and one by one, it was time for the big guy to again move in on the action. All for the good of the people and the kingdom, of course. Some governments began to require uniformity of the currency and said that they’d store the real stuff in the royal vaults and issue not only coins with the king’s picture on it, but also paper money similarly adorned. Banks were still in business, they could still take deposits of paper money and lend most of it out to other people. Amounts and denominations became uniform, ledgers and contracts were easy to keep and write, and things went swimmingly.
So let’s fast forward through a bunch of history that saw the establishment of government controlled central banks and hanky panky with the stored stuff that was to back the paper in circulation, until finally we come to the Big Change in how we looked at money.
One day someone realized that trust in paper money didn’t have to be backed entirely by silver or gold (“that barbarous relic”), but it could also be backed by people’s faith that the country and its economy would continue to hum along, and that the paper money they held would still be accepted tomorrow for a loaf of bread or car or anything in fact because the government mandated that the paper is “legal tender for all debts public and private”. This wondrous development totally unhinged money from anything of real value. In the US, paper money no longer had “Silver Certificate” on it which would let you redeem an actual silver dollar with a guaranteed amount of real silver in each. Instead you now got paid with paper that was a mysterious “Federal Reserve Note”, as it proclaimed on the top line.
And what could you retrieve with that? Well, as long as everyone kept believing (recall how Peter Pan taught us to fly?), you could retrieve anything you wanted – bread, soap, vacations, cars, … . The Federal Reserve Notes we now carry in our pockets are still backed by ‘the full faith and credit of the United States government.’ (US Constitution, Article 4, Section 1). And no one really knows what that high sounding statement means; other than after 1913 the Fed could print all the paper money needed to buy (read ‘pay off’) government debt in nominal dollars. But all the people had to keep believing was in a common tomorrow where the sun would shine and flowers bloom, because from the federal government you could retrieve nothing with that paper but a receipt for your tax bill.
So here we are today with our money, our stored wealth, represented by pieces of paper and tiny ones and zeros (‘bank money’) spinning on unknown disks in the ubiquitous ‘cloud’ that now represents the hidden vitals of our civilization. This is the part that continues to amaze me. All of this money is simply an accounting ruse that is based on nothing more than faith in the continuity of a benevolent government which, at its whim, can make those little ones and zeros be worth more or less tomorrow than what they were today. And they can also do that as an unwelcome mediator to any financial deal we care to enter with a fellow citizen or even someone overseas.
What is even more amazing is that you and I will offer the sweat of our brow for which we will receive nothing but these little spinning bits. And after the reason or result of our sweat is long forgotten, the bits are still there, spinning independently from any other factors going on in the world. All of Man’s work is frangible, but the reward for it seems to be (almost) immortal. The bits are fungible, and can therefore be transferred or traded for other similar bits. But they are nothing but faith-based ciphers of account. We must always remember that these little magnetic ones and zeros don’t merely ‘represent’ our wealth, THEY ARE OUR WEALTH, there is nothing more substantial anywhere else. You can’t plant them, build with them, eat them, or do anything with them that involves only the other party who in turn would benefit you, the government is always there in the middle.
This money, your wealth, is literally held hostage by the government in whose health and longevity you now have a very vested and enforced interest. Or to put it more crudely yet graphically – they have you by the family jewels. And suddenly, we all understand why an autocratic government will criminalize anything we do that seeks to redeem our wealth from their grip, and get them out of our fiscal pants. That is why FDR criminalized the private ownership of gold in 1933, and his successors kept it illegal until 1974.
We were again allowed to legally own gold after Nixon ‘closed the gold window’, then went on to tell the whole world that even sovereign nation-states holding dollars could not redeem them for ‘real money’ at Ft Knox. The dollar had been debased to such an extent that it essentially had no gold backing at all, and its holders, foreign and domestic, were simply told to bravely crank up their belief in the fecklessly forecasted fecund future of these United States. Since we were still the big kahuna on the world’s economic stage and the dollar was the world’s reserve currency (you could buy and sell stuff internationally that was priced and paid for in American dollars), the world had no Plan B to the dollar. Your and everyone else’s dollar denominated wealth was now only in little faith-based spinning bits – and it pays to remain focused on that ‘only’.
When you dig up a ton of coal to make electricity or warm a house, you sell it for a certain amount of money. Some of that money goes to cover your digging and transporting costs. If there is anything left over, it is created wealth. It gets to go on that faithful disk. And if in your greedy cleverness you figure out how dig more coal for the same cost and sell it for the same price, you get to pocket the extra money – that’s called increasing productivity, and the entire process of putting more money on the disk is called growth of the economy. Remember, if no money is left over when you deliver the coal, you have stasis, there is no growth. You get to go back to the mine and do the same old same old, and that gets old very quickly.
We recall that after some discernible growth in the economy, the fixed amount of dollars will have to keep buying more and more coal, and these dollars will have to spread themselves over more stuff that’s available in the economy. Since you can’t store wealth in any other way, each dollar will naturally become worth more, and in our example, it will buy more coal. This is called price deflation. It’s the Fed’s job to then ‘print’ more money and release it into the economy to keep the price of coal more or less constant, after all, the Fed’s Job One is price stability. And done right, it is by all accounts a tricky undertaking.
But what if the government, for whatever reason, decides it needs more money than it can peacefully tax out of its citizens? Simple, when you got the monopoly on printing the stuff and shooting people who try to compete with you, then you just run the printing presses and make as much as you need. The government and every El Presidente worth his salt know that they can release the new money into their economy before people realize that there are now more dollars chasing the same stuff, so the government gets to buy/pay at the old price levels. But sooner than later the jig’s up, and by the time we get our hands on it, prices will have adjusted upward to reflect the added dollars in the economy chasing the same goods and services. (That’s inflation) Your dollars buy less, and you say to yourself, ‘Sumbich, I’m not as wealthy as I was before. Where did the wealth go that I just had?’
Where indeed. Few people realize – I didn’t when I was a kid – that inflation is government induced, and that it is a hidden assets tax (I have shown elsewhere how you can compute the added tax rate that inflation imposes on us all.) So now we realize why government wants to be in sole control of the money supply, it’s a cheap way to maintain power. Our Founders knew this and counseled strongly against letting the federal government gain control of the country’s currency. Mayer Rothschild famously said, “Give me control of a nation's money and I care not who makes its laws.”
This kind of lit my light bulb when I first munched on it. A lot of things came together, including why in the early days control of our nation’s money was a widely distributed enterprise operated by individual banks, and why in the long-term none of them could issue faith-based dollars. They all had to have the real stuff in the vault or their bank notes quickly became useless, because people regularly went into their offices to withdraw and transfer the shiny stuff as their business affairs demanded.
So again it became clear since government does want power and doesn’t create wealth, it wants the best way possible to siphon wealth out the country’s economy. All the arrows point to the ‘wisdom’ of grabbing the money supply, and quickly transforming it into a faith-based medium. Oh, that doesn’t mean that governments really believe all the stuff about the ‘barbarous relic’ they and their shill economists tell the people. When it comes down to it, governments are the biggest hoarders and traders of precious metals. They trust each other’s faith-based monies only to the extent that their economies are intertwined or their militaries are mighty, otherwise they settle accounts by quietly shipping gold to each other in the dark of night.
So with all this under the belt, I ask myself where are we now. I know that both collectivists and tyrants stay in power by promising to deliver what they don’t have. And they keep the peace only by borrowing from the inattentive or confiscating it from their own at the point of a gun. The socialist disease is now so advanced that governments have promised and borrowed way beyond their ability to repay – their citizens won’t stand for the higher taxes and continue demanding the goodies they have been receiving.
At this point, the collectivist politicians’ only tool for political (physical?) longevity is to push the populist button. They know that sooner or later desperate/stupid people will accept any answer that absolves them of responsibility for the problem. The natural target is the government’s defined ‘rich’ – the actual or manufactured wealthy. Everyone else who has lent money to these downward spiraling nations wants out with their loaned amounts still having some semblance of their original buying power. They all know that governments pay off their debts with inflated currencies based on the nominal amounts borrowed (the number ‘named’ on the security).
Only it’s more than a little weird today in Europe. Eurozone governments have run up debts based on dysfunctional national redistributionist schemes, and socialist policies toward business and enterprise. They have done so while having to use the euro, a trans-national currency with which they can’t print their way out of trouble – only the European Central Bank can. France and other shaky Europeans want the ECB to do just that in order to save their banks, and the prudent and wealthy Germans say ‘Nein!’ (Interesting how governments preach the courageous cooperation of collectivism to their citizens, and then practice that “greedy individualism” when their interests are threatened.)
Coming back to this side of the pond, our banks have been pulling their money out of European banks as fast as possible, but there are still a lot of remaining dollars lent to European banks. And our money market funds, holding your and my money, are some of these lenders still on the hook. When they have to start writing off bad European loans, there is every chance that they will ‘break the buck’ – i.e. return less than the dollar you put in.
Additionally, when the big economies of Italy and Spain finally start foundering, the EU’s trade balances are all going to go cockeyed and reduce state revenues even more. This starts a rapid vicious cycle which will be felt here almost immediately. We ship about $240B annually to the EU, and run a negative $80B trade balance with them. Remember, foreign trade is a zero-sum game, everyone can’t be positive in their foreign trade account. The only good news here is that our $15T economy is so big that total foreign trade– importing $2T and exporting $1.3T – subtracts only $0.7T or about 5% of our GDP.
(BTW, it’s good to remember that GDP = C + I + G + NFT, where C is household sector consumption, I is investment in the business sector and residential housing, G is public sector expenditures minus transfer payments, and NFT is the net of foreign trade. Note that the higher G is, then C and I are lower because government takes money from the private sector – through taxes and inflation - and borrows the rest for its expenditures. Understanding that simple little formula explains a lot of how liberals differ from conservatives, and how the liberal path leads to eventual ruin.)
So how can I keep the buying power (wealth) of my little ‘ones and zeros’ from evaporating as governments around the world do all they can to transfer that buying power into their incompetent and corrupt hands? There is no easy answer. Buying ‘things’ to get your wealth out of faith-based money that is made and mediated by elected liars and thieves is the first thing that comes to mind. The only problem with that is giving up liquidity – being able to use your money when you need it – and having possession and disposition of your ‘things’ encumbered or worse – your ownership and handling criminalized with the stroke of a pen by a government bent on taking everything they can get.
And as we try to save what we can, what if I and a lot of my neighbors don’t buy things today? Then tomorrow you and others might decide not to believe in the worth of anyone’s faith-based ones and zeros on the disks. And when we buy again as we must, you might want to be paid in something less religious and more substantial. Then will those same ones and zeros still BE (not ‘represent’) my wealth as they were yesterday? And if not, then what will I do now with my long held faith that I should, perhaps, have done at an earlier and more prudent time?