PAPER AND ELECTRONS

I was reading a brief opinion piece by Mark Calabria on the housing crisis. In essence, he was decrying the old expedient of trying to “fix” it by writing down mortgage debt in the face of an overabundance of housing brought about by the prior real estate bubble. He states, “the notion that forced mortgage write-downs creates wealth, and hence increases spending, is false. But why let facts get in the way of a blind devotion to theft as a manner of creating wealth?” It got me to thinking about the many artificial aspects of our modern economies.

In biblical times it was simple: There was no intermediary for transactions. Your wealth was determined by your land and possessions; transactions occurred by bartering goods and market forces determined what the price of an ox would be (ten chickens and two sows, the hand of a young maiden, whatever). Wealth, in some fashion, was inextricably tied to production. Of course, as in present times, it was also acquired by plunder (thieves and kings specialized in this approach). Even this was tied to production, albeit forced.

Today things are more complicated. Now we use an intermediary known as currency. This revolutionized trade by simplifying the process of defining value and allowing transactions to occur in a standardized fashion over great distances. It also brought with it new hazards. Chief among them is that a currency’s value is based on consensus and faith. Currency has no intrinsic worth. You can’t eat it, plant it, live in it or use it effectively as a weapon. Even the “gold standard” has no intrinsic value with respect to survival beyond that which we bestow on it for our convenience.—and it’s a *&?!# to cart around. So the government had the bright idea of substituting paper. Now, paper is mobile but does require a bit more of a leap of faith to accept in trade for the sweat of your brow. So the government promised to pay, on demand, gold or silver for the bills it printed. The cash in your pocket or bank account was an IOU, and it kept the government honest—they had to back every dollar. Then Nixon came along and said, “we don’t need no stinking gold—you have the word of the mighty federal government as collateral.” Well, since people rarely exchanged dollars for metal, this seemed like a great idea. No waste of time and effort (and expense) enlarging Fort Knox just to print money which everyone accepted as legal tender anyway. So the silver certificate gave way to the Federal Reserve note. And, with the added bonus of the dollar being accepted internationally as the world’s reserve currency, there was an added bonus: If we needed more, we could simply print it for the price of some wood pulp a and few buckets of ink. Everything was hunky-dory.

All that remained was to decide how much money to print. In the old days, it was intrinsic to the system: no chickens, no deal (unless your reputation could swing an IOU like the feds). Nowadays the government, conveniently, is the arbiter of the money pool as well as its producer. It regulates the money supply based, I imagine, on  arcane formulas based on other arcane formulas that estimate the size of the economy. If done accurately (and we know the government’s watch-word is “precision”), it will reflect the economy’s production. In a perfect system we would expect zero inflation. Unfortunately, we like “things,” and have come to expect them regardless of the annoying constraints of production. So we developed a concept known as “quantitative easing.” It sounds better than “printing more money to cover our flagrant disregard of the budget since we’re already in hock up to our eyeballs.” We’ve been able to get away with this because the world, to this point, accepts the dollar as its reserve currency. But printing more money without commensurate increase in production has a price. In 1914 the dollar’s buying power was about $22. In 1960 it was worth less than seven and a half of today’s dollars. Despite this, the wonders of modern technology have allowed us to live at a higher standard of living, although not as “high on the hog” as we’d like to think, to which our $15 trillion in debt can attest. So far we’ve had a couple of rounds of “quantitative easing” and I’ve heard experts claim it takes about 2 years to feel the impact. Is that little swell out there in the ocean an inflation tsunami on its way?

Having divorced currency from production through paper, we then decided that even that was too cumbersome, and began doing most major transactions electronically. Electrons are very light, take up almost no space, and travel, well, at the speed of electrons. This allows people to push around huge sums of money in an instant. Those least productive members of society who make a living off of buying and selling futures and trying to guess the direction stocks will take can scoop billions from the system without producing a single tangible object. This, it seems to me, the layperson, to create an even larger imbalance in this massive, complex chimera we call the global economy. And now it’s wobbling dangerously off center. So, while the rest of us sit mesmerized or dazed by experts pontificating in an arcane lexicon devised to impose a semblance of order on this teetering artificial monstrosity, our leaders devise foolish plans that fly in the face of logic and basic economic sense, or find themselves unable to do anything at all. But what do I know?

Well, I do know you can’t eat paper and electrons.

Advertisements

Tags: , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: