Money, Money Everywhere…But What Will It Buy?

With all the talk about deficits, debt and budget proposals it is a good time to review some observations and facts about our currency or money because much of the “money” used in our economy is not in currency.  After all the debts, deficits and budgets are all about money; the revenue and expenditure of it and the total amount in circulation throughout our economy.

It is always a good place to start with the reminder that we have a “fiat” money system.  That means the dollar you carry in your billfold has nothing of tangible value to back it up.  There is no gold, silver or anything else you can wrap your arms around that supports that worth of the dollar.  Time was of course when it was backed fully or partially with gold or silver.  That is, you could go to a local bank and turn in that paper money for real, honest to goodness gold if you wished.   The dollar today is based only upon the full faith and credit of the United States, whatever that means.  That last comment is not facetious.  You can find a thousand different opinions about what that phrase means.  The bottom line is that the value of our dollar is purely psychological.   It’s value is a function of mob rule.  If tomorrow most of the people here or around the world decided that the dollar really couldn’t get them much then it’s value would plummet.   It is only because the merchant you give the money to believes he in turn can give the money to his bank or supplier for new credit or supplies that allows our economy to work.  It is strictly a matter of confidence.

There was a time a couple of generations ago that the dollar was the strongest currency in the world even as a fiat currency.   There wasn’t a competitor worth even mentioning.  Inflation was stable and our economy generally was on an upward trend.  The alleged recession that Kennedy ran against in the ’60 campaign would be laughable today.  Back in those halcyon days people wanted the dollar because with it you could buy things they wanted.  They wanted American made TVs, cigarettes, transitor radios, Singer sewing machines, Coca-Cola, and those big American-made cars.   essentially everything worth having and things desired by people around the world could be had here for a good price and the quality was the best in the world for most products.   The dollar was strong because the demand was high for it and what you could get with it.

Unfortunately we have been resting on the oars too much for the last generation or more.  We allowed our manufacturing base to slip each year, never a dramatic slid but steady like that drip off the roof.  We used to literally laugh at the concept of Japanese quality but we became complacent.  We allowed too much crony capitalism to work into the system and too much union control of the work place.  Others didn’t stand still and improved the quality and quantity of desirable products.   One result of the power of unions was the movement of our manufacturing process overseas.   We started mostly in Korea and Mexico and spread out from there.

We’ve allowed our debt to balloon in the last few years and the deficits have exploded.  Likewise the Fed has printed up about 2 trillion in money so far.  Literally out of thin air as they are allowed to do.   Fortunately for us the rest of the world has some problems of their own at the moment or we would be in even much worse shape.  We are doing Ok, not great, but only because our fever is not as high as those of some of our competitors around the world.  We are lucky that oil is bought and sold in dollars at the moment, but that arrangement is not written in stone anywhere.  With the recent chill in our relations with Saudi Arabia and it’s warming to China it is not inconceivable that Saudi Arabia might start accepting the yuan for oil purchases by them.

Inflation is driving toward us and as it gets closer it gets faster.   The Fed can talk all they want about “core” inflation being fine but the guy on the street knows what it costs him to buy the same product he bought last year cheaper.   If we fail to right the ship in the immediate future the “mob” may quickly turn on the US dollar.  They will start with demanding much higher rates of interest on our borrowings  (US treasuries) which in turn will make our deficits and total debt move up much more rapidly and the cost merely to service our debt will be the biggest item in the annual US budget. 

It is like when you are walking down the street and notice someone looking up, then you do too, then everyone around you.  When those first glimmers of doubt about what people can get with their dollars begin to emerge they will spread quickly.  If old Joe is wanting more interest then you can bet for sure Harry will start thinking the same way.  After all what can folks get for their dollar?   Heck by the end of summer it will take 5 of them to buy a gallon of gas.    Then you have shortages and lines because of the concerns you can’t get something tangible (gas, pencils, electricity, etc) with your dollars.   We’ve had so-called Panics in the past but they were mostly dislocations in the economy.  With our purely fiat money the next panic will be just that–mob fear.  The realization that you  are carrying on a piece of paper in your pocket that doesn’t represent anything.  Balancing our books and reducing our spending to match our income  can restore  confidence that is if done in time.  If we pass the tipping point then we’ll have pain not yet imagined.   The sands of our financial time are getting down to the dregs on the hour-glass.

“There is only one success–to be able to spend your life in your own way”  C. Morley.  The antithesis of the nanny state.  www.olcranky.wordpress.com

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