The United States is so overextended today that it is doubtful it could ever honor its overall real debts.
- From: bromselick@xxxxxxx
- Date: 18 Aug 2005 22:01:59 -0700
The Great Dollar Standard Era is a direct result of the removal of gold
as the underpinning of the world's currencies. The vast overprinting of
currency will inevitably debase the value of the U.S. dollar and,
because so many foreign currencies are pegged to the dollar, the
currency of those nations as well. Fiat money, simply put, is created
out of nothing. A future promise to pay has never supported monetary
value for long and the United States is so overextended today that it
is doubtful it could ever honor its overall real debts.
Counting obligations under Medicare and Social Security, the real debt
of the United States is more than 10 times the reported national debt:
"Taking present values as of fiscal year end 2002 and interpreting the
policies in the federal budget for fiscal year 2004 as current
policies, the federal government's total fiscal imbalance is equal to
$44.2 trillion."
The argument favoring the current fiat system is that the demand for it
grew out of barter, the need to facilitate ever-higher volumes of
trade. If this were true, there would be a reasonable expectation that
a system of paper drafts would make sense. But the reality is that fiat
money has not grown out of barter, but from the previous gold standard.
Given the lack of control over how much fiat money is placed in
circulation - after all, it is based on nothing - we can only expect
that the currency will continue to lose value over time. The model of
fiat money is supported and defended with arguments that consumption is
good for the economy, even with the use of vacant monetary systems. But
there is a problem:
"The predictions of these models are at odds with the historical
evidence. Fiat money did not in fact evolve . . . by means of a great
leap forward from barter. Nor did fiat monies ever emerge out of thin
air. Instead, fiat monies have always developed out of some previously
existing money."
Can we equate the problems inherent in fiat money with the effects of
inflation? We have all heard that saving for retirement today is
problematical because, by the time we retire, we will need more dollars
to pay for the things we will need. By definition, this sounds like the
consequences of inflation. But inflation is not simply higher prices;
it has another aspect, which is devalued currency. We have to pay
higher prices in the future because the currency is worth less relative
to other currencies. That is the real inflation. Higher prices are only
symptoms following the debasement of currency. If we examine why those
prices go up, we discover that the reason is not necessarily corporate
greed, inefficiency, or foreign price gouging. At the end of the day,
it is the gradual loss of purchasing power, the need for more dollars
to buy the same things. That's inflation. And fiat money is at the root
of the problem.
The intrinsic problem with fiat money systems is how it unravels the
basic economic reality. We know that it requires work to create real
wealth. We labor and we are paid. We save and we earn interest.
Government, however, produces nothing to create wealth so it does so
out of an arbitrary system: fiat money. The problem is described well
in the following passage:
"It takes work to create wealth. 'Dollars' are created without any work
-how much more work is involved in printing a $100 bill as compared to
a $1 bill? Not only are ordinary people at home being deceived, but
foreigners who accept and save our "dollars" in exchange for their
goods and services are also being cheated."
So are we "cheated" by the fiat money system? Under one interpretation,
we have to contend with the reality that the dollar is not backed by
anything of value. But as long as we all agree to assign value to the
dollar, and as long as foreign central banks do the same, isn't it okay
to use a fiat money system?
The problem becomes severe when, unavoidably, the system finally
collapses. At some point, the Federal Reserve - with blessings of the
Congress and the administration - prints and places so much money into
circulation that its perceived value just evaporates. Can this happen?
It has always happened in the past when fiat money systems were put
into use. We have to wonder whether FDR was sincere when, in 1933, he
declared that the currency had adequate backing. It wasn't until the
following year that the president raised the ounce value of gold from
$20.67 to $35. He explained his own monetary policy in 1933 after
declaring the government's sole right to possess gold:
"More liberal provision has been made for banks to borrow on these
assets at the Reserve Banks and more liberal provision has also been
made for issuing currency on the security of those good assets. This
currency is not fiat currency. It is issued on adequate security, and
every good bank has an abundance of such security."
It was the plan of the day. First, the law required that all citizens
turn over their gold to the government. Second, the value of that gold
was raised nearly 70 percent to $35 per ounce (after collecting it from
the people, of course). Third, the president declared that currency
printing was being liberalized - but it is backed by gold, so it's not
a fiat system. This may have been true in 1933, but since then - having
removed ourselves from the gold standard - the presses are printing
money late into the night. The gold standard has been long forgotten in
Congress, the Federal Reserve, and the executive branch.
It may be the view of some people that a perfect monetary system may
include changes in value based on purchasing power and on the demand
for money itself. Thus, rich nations would become richer and control
the cost of goods, while poor nations would remain poor. In spite of
the best efforts under the Bretton Woods Agreement, it has proven
impossible to simply let money find its own level of value. Unlike
stocks and real estate, the free market does not work well with
monetary value because each country has its own selfinterests.
Furthermore, today's post-Bretton Woods monetary system has no method
available to prevent or mitigate trade imbalances. Thus, trade surplus
versus deficit continues to expand out of control. The United States
ended up accumulating current account deficits totaling more than $3
trillion between 1980 and 2000.This perverse twist on world money has
had a strange effect:
"These deficits have acted as an economic subsidy to the rest of the
world, but they have also flooded the world with dollars, which have
replaced gold as the new international reserve asset. These deficits
have, in effect, become the font of a new global money supply."
This is what occurs when international money supplies become
unregulated. We need a firmly controlled world banking system if only
to stop the unending printing of money. If, indeed, U.S. deficits
continue as a form of subsidy to the rest of the world, that can only
lead to a worldwide economic collapse like the one seen in the 1920s
and 1930s.
If it were possible to create a controlled international monetary unit,
its effectiveness would demand ongoing regulation to prevent the
disparities between nations with varying resources and reserves. Ludwig
von Mises wrote that:
"The idea of a money with an exchange value that is not subject to
variations due to changes in the ratio between the supply of money and
the need for it . . . demands the intervention of a regulatory
authority in the determination of the value of money; and its continued
intervention."
Mises concluded that this need for intervention was itself a problem.
It is unlikely that any government would be trustworthy enough to
property ensure a fair valuation of money, were it left up to them;
instead, governments are more likely than not to fall into the common
fiat trap. Without limitations on how much money can be printed, it is
human and governmental nature to print as much as possible. Mises
observed that fiat money leads to monetary policy designed to achieve
political aims. Mises:
"The state should at least refrain from exerting any sort of influence
on the value of money. A metallic money, the augmentation or diminution
of the quantity of metal available which is independent of deliberate
human intervention, is becoming the modern monetary ideal."
To an extent, the enactment of a fiat money system is likely either to
be politically motivated or to soon become a political tool in the
hands of government. We have to see how government attempts to
influence economic health through a variety of means and in tandem with
Federal Reserve policy: raising and lowering interest rates, enacting
tax incentives for certain groups, legislating tax cuts or tax
increases, and imposing or reducing trade restrictions or tariffs. All
of these moves invariably have a pro and con argued politically rather
than economically. The argument in modern-day U.S. politics is between
Republican desires to reduce taxes as a means of stimulating growth
versus Democratic views that we cannot afford tax cuts and such cuts
are given to favored upper-income taxpayers. The arguments are complex
and endless, but they are not just political tools; they are part of
overall monetary and economic policy trends as well.
This has become our modern entry in the history of money. The belief on
the part of government, rooted in an arrogant thinking that power
extends even to the valuation of goods and services and monetary
exchange, has led to a monetary policy that makes utterly no sense in
historical perspective. Having gone over entirely to a fiat standard,
government has chosen to ignore history and those market forces that
ultimately decide the question of valuation, in spite of anything
government does. This has always been true, as Jeffrey M. Herbener
observed:
"The use of the precious metals was historically the choice of the
market. Without interference from governments, traders adopted the
parallel standard using gold and silver as money."
If monetary policy were left alone and allowed to function in the free
market, what would happen? Perhaps governments ultimately do follow the
market by adopting the gold standard, as we have seen repeatedly in
history: going on the gold standard, moving to fiat money, experiencing
a debasement, and then returning to the gold standard. Herbener
continued by observing,
"The fly in the ointment of the classical gold standard was precisely
that since it was created and maintained by governments, it could be
abandoned and destroyed by them. As the ideological tide turned against
laissez-faire in favor of statism, governments intent upon expanding
the scope of their interference in and control of the market economy
found it necessary to eliminate the gold standard."
Today, we live with that legacy. While historians marvel at the "end of
history" and the triumph of free market economics, the Fed maintains
"price controls" on the very symbol of economic freedom - the U.S.
dollar itself.
Regards,
Addison Wiggin
.
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