Archive for Sunday, July 5, 2009

U.S. must restore faith in monetary system

July 5, 2009


Money is the root of all evil. But, according to Niall Ferguson in “The Ascent of Money,” it’s also the “root of most progress.” Woolgatherers from Rousseau to Marx have dreamed of a society that operated without money. Yet, money and its offspring — credit and debt — have been “as important as any technological innovation in the rise of civilization,” writes Ferguson.

Money in some form has been around since the beginning of time. Shells, beads, stone discs, cattle, gold and silver have performed its roles. But money got really interesting when someone figured out that paper backed by gold could serve as a medium of exchange. A unit of gold held in reserve could be multiplied by issuing units of paper money. It was a kind of magic, which dramatically stimulated economic activity and increased wealth. As long as people had faith that they could redeem their paper for gold, the magic worked.

At some point, however, the magicians created too much money. Excess liquidity drove prices up. Fear overcame euphoria. One day the gong of doom sounded and everyone wanted to exchange paper money for gold. But there wasn’t enough gold in the vaults to cover all the paper money afloat. A moment of epiphany arrived: The paper was worthless. The bubble burst. The financial system collapsed.

We’re living in a modern version of this eternally recurring tale. There are many competing explanations for the current economic meltdown. The web of mistakes and culprits was complex. But the ultimate cause was expansive monetary policy. Low interest rates and excess money supply inflated the bubble, driving up the price of real estate and oil, tempting investors to take outrageous risks and stoking the deadly sin, Greed. This should have been no surprise. Loose monetary policy makes booms and busts inevitable. Now, the government’s colossal bailout and stimulus schemes promise to inflate another bubble — while we’re still recovering from the last.

“Money is a matter of belief, even faith,” writes Ferguson. The word “credit” comes from the Latin “credo,” belief. But faith in money is being tested today. One problem is that money is no longer backed by gold or any other commodity. The dollar is a “fiat currency,” backed by nothing other than the nation’s credit. Too much borrowing and spending has made that credit look shaky. There’s even been talk of the United States losing its AAA credit rating.

For a long time, the dollar has been the world’s “reserve currency,” an immense advantage in the global market place. Like the British before us, we’ve abused that advantage. The day of reckoning may be at hand. Those who’ve funded our deficit spending and profligate consumption are getting nervous.

The Chinese fear that we may “monetize” our debt — that is, devalue the dollar so that we can repay them with cheaper money. China has recently expressed interest in some alternative international reserve currency. Loss of the dollar’s unique status “would have serious costs for America,” writes economist Nouriel Roubini. “Our ability to finance our budget and trade deficits cheaply would disappear.” The decline of the dollar might take more than a decade, “but it could happen even sooner if we do not get our financial house in order.”

What would it take to get our financial house in order? The United States must “rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles,” writes Roubini. By the same token, individual Americans must spend less and save more. Everyone would have to swallow bitter medicine and suffer some deprivation.

Entitlements would have to be cut. Restoring faith in the dollar would require more disciplined monetary policy. Failure to get our financial house in order means higher taxes and higher interest rates, more costly imports, less economic growth, a lower standard of living, fewer resources to fund our social and environmental agendas and a decline in the value of our savings.

Does anyone believe that our gerrymandered, earmark-addicted politicians have the moral courage and sense of responsibility to get our financial house in order? Even the president of the Dallas Federal Reserve is skeptical.

“Throughout history … the political class has … turned to the central bank to print their way out of an unfunded liability,” said Richard Fisher. He estimates the government’s unfunded obligations for retirement and health care at more than $99 trillion.

Other experts are gruffer yet.

“Quite frankly, we do not trust the government,” said fund manager Bob Rodriguez. “We will not lend long-term money to a borrower that capriciously erodes its balance sheet.” Monetary expert and Stanford professor John Taylor calls our government, “the most serious source of financial risk today.” Lenin is supposed to have predicted the death of capitalism on the basis of policies unfolding today: “There is no subtler, surer means of overturning the existing basis of society that to debauch the currency. By a continuing process of inflation, government can confiscate an important part of the wealth of its citizens.”

Roubini calls our current debacle “the biggest asset and credit bubble in human history. But our predicament is nothing new. In A.D. 64, the emperor Nero decreased the silver content in Roman coins and made them smaller. Two centuries later, there was virtually no silver in the coins and wheat was two hundred times more expensive.

In the early 20th century, German printing of paper money resulted in an annual inflation rate of 182 billion percent. Since 1957, the purchasing power of the dollar (relative to the consumer price index) has declined by 87 percent.

What to do? An area banker recently answered that question: “I pray.”


Richard Heckler 8 years, 5 months ago

Let's talk about which entitlements must go at the local levels most of which impact our local personal bank accounts.

Developers actually love government entitlements and the corporate welfare it so generously donates from the city,state and federal levels. At a huge cost to local taxpayers. Yes local taxpayers do help increase developers vast wealth while depleting their own bank accounts. Seldom do developers sound grateful.

Local entitlements impact our wallets far more significantly yet local taxpayers get distracted by antics in Washington D.C. Downtown the day after our poor,pitiful and disastrous turnout for the city commission election Mayor Chestnut and I agreed on this issue.

Allow me to present 3 descriptions as to how we local taxpayers are far too generous with local "assumed entitlements" for OUR own good:

“Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You with the Bill)

Not Smart Development Increases Taxes:

Local Expert Thinking With Excellent links

just_another_bozo_on_this_bus 8 years, 5 months ago

Yea, I agree. All we have to do is make sure our abstract units of exchange are based on a somewhat rare metal, and all our economic woes will be over. I mean, it's so obvious, isn't it?

camper 8 years, 5 months ago

Great article. However, I believe loose lending practices were a major contributor to the Real Estate bubble. Part of this was greed on the part of the mortgage and banking industry, and part of it was unwise borrowing on the part of homeowners. Greed.

In my mind, the SEC did not properly exercise it's oversight of these lending institutions as it allowed these "toxic" loans to be bundled and traded as AAA securities. If the SEC drew the line, much of this unwise lending would never have taken place.

So now we are where we are, and there is really no good solution. We could put a severe halt to government spending, or we could try to minimize the recession thru stimulus or other intervention (which may soften the blow now, but cause problems down the road). Which way should we go?

headdoctor 8 years, 5 months ago

When will people ever get it right? Money is not the root of all evil. Money is just a tool to use to get what you want. The LOVE OR LUST of money and power is the root of all evil.

Marion, just when has there been anyone in the White House that caused one to have faith in the system or our money?

jmadison 8 years, 5 months ago

Pegging a currency's value to a precious metal such as gold helps prevent our politicians from profligate spending. They can't just crank up the printing press at the Treasury like they are doing now and devaluing our currency. Nixon was the one who took us off the gold standard. The Bretton Woods Accord in 1944 when Truman was President had formalized the gold standard. I guess that was the last time someone in the White House caused us to have faith in our money.

Godot 8 years, 5 months ago

"The President is actually part of the Goldman Sachs Working Group on keeping the sheep hypnotized while they are being fleeced. " jlk of Philadelphia, 7/5/09.

"Where is Barack Obama, the invisible president?" Max Keiser, July 3, 2009

headdoctor 8 years, 5 months ago

jmadison (Anonymous) says…

Pegging a currency's value to a precious metal such as gold helps prevent our politicians from profligate spending. They can't just crank up the printing press at the Treasury like they are doing now and devaluing our currency. Nixon was the one who took us off the gold standard. The Bretton Woods Accord in 1944 when Truman was President had formalized the gold standard. I guess that was the last time someone in the White House caused us to have faith in our money.

Your kidding, right. Even when our money was backed by gold it didn't stop deficit spending or the Feds playing with funny money. The mint can't print enough money to make up the difference even running 24/7 for years. The so called printed money is nothing more than ones and zeros in a computer system. They did it then and they are doing it now. Just more of it and in a more modern way than years ago.

headdoctor 8 years, 5 months ago

The faith didn't come from who was in the White House it was from the money being backed by gold and before that silver.

Godot 8 years, 5 months ago

Speaking of faith in the monetary system, did you take note of the "computer glitch" on Thursday at the New York Stock Exchange on Thursday that caused the market to stay open for an extra 15 minutes. Did you notice the thin volume of trades, and the lack of volatility?

A former Goldman Sachs employee was taken into custody by the FBI late last week on charges that he stole the source code for their "black box" quant trading software, and uploaded it to a website in Germany owned by someone in the UK.

Goldman Sachs is the largest dealer in computer trading in the world, and it is the primary dealer for the US Fed and the Treasury. Someone in the "competition" now has access to the code that enabled GS to reap billions that justified the huge salary increases for its emploiyees (announced last week, coincidentally).

Happy trading on Monday.

Godot 8 years, 5 months ago

I forgot to mention that, as a result of the theft of their code, Goldman Sachs ceased computer generated, or quant, trading on Thursday. I wonder how long it will take them to devise a code to counter the stolen code now in the hands of "who knows?"

Godot 8 years, 5 months ago

barrypenders, I cannot make sense of what you are writing.

Bush set up Obama's first, second and third shots with the aid of the Democrat leadership. They were the TARP, then approval of the second half of the TARP, the stimulus, and the GM/Chrysler bailouts.

'splain to me that there is any difference between who controlled the Bush administration and who controls the Obama administration, without twisting yourself into knots.

Godot 8 years, 5 months ago

Faith in Keynesian economic philosophy is as dangerous to modern civilization as is faith in the man-caused global warming doctrine.

headdoctor 8 years, 5 months ago

Our money system is flawed and has been at least since the creation of the Federal Banking system. It might have worked if everyone was honest. To prevent tampering by individuals or a group such as large bank corporations, stocks creating private ownership in the Federal Banks should never have happened. We have seen of late how that turns out. Even though there is finger pointing, the large banks and insurance companies have for all practical purposes tried to take over the country and did so without firing a shot. They might have actually pulled it off if it were not for a few things going wrong that they didn't plan on.

Also, it is ridiculous that the Government borrows money and pays interest before they collect taxes and user fees leaving this country always in a state of debt. That holds even if the National Debt was zero today, we would be in debt tomorrow.

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