Friday, December 04, 2009

I'd like some more money, please

The purpose of this article is to frighten you.

I will fail.

Suppose that tomorrow the government decides on a new monetary policy. From now on, money is no longer represented by a green slip of paper that fits into your wallet. It is represented by a number 1 that goes into a computer database. The government will assign you that number based on a list of attributes you have.

The system they’ve devised is admittedly imperfect, but it is said by them and accepted by you that it will work. It is, of course, rife with fraud. For example, the bureaucracy of workers who service “the computer” have an advantage. Grandma in Minnesota needs some help, so, worker X, her granddaughter, sits at the database and Grandma suddenly has enough ones in her account to pay the heating bill. A politician does not support his leader in a congressional fight. So, a series of favors are called in and suddenly politician Y finds that his ones, once substantial, have been replaced by zeros. Now, politician Y’s account is too low for him even to get to Washington, D.C. to try and change the law. He doesn’t have the ones necessary. But, when he tries to log into the one way to contact the money creator located at an unpublished address his computer is not acknowledged by its online portal, as the site doesn’t recognize his password. He can’t by food or get gas for his car. He can’t even go to the emergency room when he has a breakdown.

But, we accept all the fraud, because every government institution we've dealt with is shot through, if not totally dependent upon, fraud. Still, this all presents such a problem that the government decides to allow us to replenish our accounts by simply requesting more ones. We all do so, everyone going to their computer each morning and downloading as many ones as each person thinks he will need.

For the first time in our history, perfect equality is achieved. The man whose father’s father’s father was an indentured servant or slave can afford to eat at the same restaurant with the woman who’s mother’s mother’s mother got the monopoly on ferrying people across the Mississippi River in Missouri. The graduate of the Advanced Institute for Knowledge, created by the government in the same sweeping set of laws used to change the monetary system, can apply with confidence to the same job as the graduate of Stanford University, because their degrees have been rendered equivalent. Should anyone prefer the Stanford graduate, they will have discriminated, and the number of ones in their account will be restricted, pending review.

The government also decides in the Revised Constitution, passed according to the old constitution (which, is now kept only in digital form, and now subject to amendment by the government when its law appear out of step) that it can pass laws retroactively such that when something appears unfair, which means it has been applied to some person or entity with sufficient connections to government, it can be fixed digitally. Phew. Imagine, for the first time in our history we are freed from the tyranny of the law.

At the beginning the government rations the amount of ones that you can have, but soon they realize that this isn’t sufficient for the demand and double it, then they triple and quadruple it. And then, they make it unlimited, because after all, what’s more important than economic freedom. Price no longer matters. Hotels multiply the price for a nights stay to a billion dollars a night and a woman who used to be homeless can now afford to stay there because she has enough ones in her account. Her husband, suddenly freed of the need for the relationship, charters a jet for Hawaii and buys a resort where he can indulge himself. But, no one wants to work there because they want their own resort. His volunteer slave girls realize they too can make money effortlessly and leave, ruining his fantasy.

In fact, the problem no longer is that people don’t have enough money. It very quickly becomes that there are no longer sufficient assets in the world to satisfy all the demand. Everyone wants jets and resorts and sex and i-phones. Suddenly, as quickly as everyone became rich, they become poor, because a bunch of greedy people who got their first are hogging all the real stuff. Those who steadfastly increased their accounts to the highest amounts took as much as they could and now sit upon their dragon’s hoard. They have no reason to accept more ones than they paid for it because if they sell their resort, they won’t be able to buy a new one, because there are no more for sale.

So, the government decides the only thing it can do is regulate again the amount of ones and zeroes in everyone’s account. First, everyone’s accounts are reduced to zero and then a small amount is given back, except that such institutes or persons the government believes are important or too big to fail, get a lot more. A LOT more. Astonishingly, it turns out that the same group of people who had the money before, have it again. Get out of the resort and go home. If you have a home, that is.

Finally, to avert a panic, the government issues a statement saying, essentially, everything is okay. Go back to sleep. And we do. Because we know that very, very smart people, have fixed everything. They’ve told us so, and they would know. Right?

The reason none of us are frightened by this scenario is because we have grown up in the precursor for it all of our lives, and we are conditioned to it. If it actually happened like that, folks would adapt to it, so long as it remained doable, just as we have adapted to the system we already have.

Think about it. How much money do you have? In the “old days” the only answer you have ever known is that society’s appointed money-keepers, the banks, have printed it out in a “bank book”. These numbers came from a record they kept and shared with you. If you went up to a bank window, you could present a book and that book would have a number typed into it. You could withdraw that amount of money.

Today, you don’t need the silly paper book. Kids don’t even know what that is. You go online and your computer, attached to other computers, tells you what is available for you. Suppose you need more money than that. You ask the bank for a loan. If the bank wants, it adds to the number of ones you have by typing it into the computer. But, where does the bank get the money? It doesn’t have an equivalent amount of little green slips of paper or, perish, the thought, gold, in its vaults to back it up. It has a promise from the government to make good on the ones if necessary. That’s how you bought your house, isn’t it? You didn’t have to show up with a suitcase of money anywhere did you? It was just represented on paper how much money you were lent, and then that paper was sold to another company of which you never heard, or ultimately Fannie Mae or the like, and you will try to pay it back. And when Fannie Mae failed, the government just printed the money to pay its debts and take it over.

Of course you are not scared by my scenario. You already do all this. Suppose you decide you want to own a company, or a part of it. You go into your Schwab account (like I do) and you digitally purchase your share. You don’t even send a check anymore. A computer tells another computer that you have enough ones in your account. Or, the computer says that it will let you buy it on margin (by increasing your ones) and you have to repay it. If you can’t repay it, you file for bankruptcy and, not only can you keep the most important stuff, but all your minus ones or zeroes are digitally wiped away.

The Dow Jones Index was at 14,000 in 2007, went down to under 7,000 last year and is now over 10,000. Sophisticated traders (not me) make money going up and down, but most people lost their shirts, in some cases changing their lives. We are used to it.

Your whole lives, you have never had to think about the value of the piece of paper you call a dollar. That dollar used to be a representation of an actual thing – an amazing metal which was not only beautiful, but incredibly malleable, and strong at the same time. Obviously, I mean gold. Silver too sometimes. This system has existed since we first began to write things down in symbols. But not so many moons ago we changed all that. Over the course of the last century, and last in 1971, we severed our connection between dollars and gold or any commodity and began a system where the government just decides how much money is worth. You probably don’t even believe that, do you?

You think the real system is less ridiculous than the one I suppose here? What if I told you that for many decades, instead of the government adding zeroes to your account, it has simply increased the number of dollars in the system. Because it is certainly true. At first, they did this with some restraint, but very soon, WWI required much more, so it was printed. And, then WWII. Now, when we have a recession, or a depression, depending on what you call it, we just print more and more money without rhyme or reason. Money now has almost no value. The difference between that and a 95 percent tax over the same period of time is non-existence. And, of course, on top of that, we pay taxes that are actually called taxes too.

Don’t believe me, right? Because you can still buy stuff, right? How could they – the smart people in the world who run our government (please note the sarcasm here) let this happen anyway? It’s not possible. Really? Did you know that last year the government increased the monetary base by a factor of je ne sais quoi (honestly, I am working on completely understanding the difference, if any, between monetary base and money supply, but very safe to say, the Fed has increased the amount of circulating dollars by an astronomical amount and plans on more). Really? How’d they do that? Why, by adding ones to digital accounts and printing out slips of paper which represented them. Oh. But, who is getting those dollars? Not me. Not you. Oh, we can rest easy. It was given to banks, owned by a handful of people who decide what to do with it, and to the biggest companies in the world. Where'd the government get the money from - well, by selling securities to China and other countries. After all, the government won't default, it will just print more money. That's why, my portofolio these days is just gold and securities.

But, you have been told your whole life that stuff like this doesn’t matter (starting to sound like The Matrix, isn’t it?), because the former great fear, inflation, has been conquered by the banking system, which juggles its book or adds to the cost of money by manipulating the interest rates, and therefore regulates it. So, everything is okay, right? Alas, were that true.

Want to see something really scary? Go to www.infoplease.com/ipa/A0001519.html and see how much value a dollar has now compared to 1913. Almost none - less than 5%. What cost 1 dollar in 1913 now costs $21.57 cents. What do you care? Because money has become make believe, and so plentiful, there is no need to worry. Alas, yet again.

When we came to the head of our crisis last year, the government decided to rectify it. It let all the banks which had made mistakes fail. It let the companies and people that irresponsibly borrowed money fail. New people came in and swept up the carcasses of these companies and banks for a song, re-employed the workers, entered into new and more rational agreements with each other, and saved our system, putting our national debt onto a downward tract and balancing the budget.

Except, of course, we did none of that. Starting under Bush and then greatly increasing under Obama, we did the opposite. The government ignored all the existing laws, that is, the rules under which we all must play. The Federal Reserve and other federal agencies simply increased the amount of ones available, as I said, doubling the supply (based on nothing substantial), and gave it to the companies and banks that had made the biggest mistakes or committed the biggest frauds or were the most irresponsible, and magically increased their purchasing power, greatly reducing yours. They did this so that there would be money available to the smaller businesses and individuals to get credit – the system we’ve devised based on us all spending money we don’t have.

I wonder what the value of a dollar will be in say 2012 or 2020, because at some point people have to wake up and see that the Emperor has no clothes and neither do they. That will be scary.

But, you are not frightened, are you? That’s because you have always lived under a similar system. In fact, the children born into the internet age are the least frightened, because everything is just a matter of ones and zeroes on the computers they’ve grown up with. Money is no more or less real than the games they play. All of this is merely a consequence of the fiat money system, that is, a system where the government dictates the value of the medium of exchange rather than a market based on the value of a central commodity like gold or silver or a cow. And, it changed our lives way before we were all born (well, not my Aunt Tess, but I assure you she doesn’t care).

Even knowledge for most of us has been reduced to ones and zeroes. I like to refer to Google and Wikipedia as the sum of all knowledge, a fulfillment of the imaginary Encyclopaedia Galactica imagined by Douglas Adams, author of the Hitchhiker’s Guide to the Galaxy series of books.

When people have a question, they just put the question to Google (what I do too) and look it up in Wikipedia, the encyclopedia that anyone can change. No thought or analyses is required. A few years ago, for example, I was told I lost an argument about whether bas-relief (look it up on Google and Wikipedia if you don’t know what it is) was two dimensional or three dimensional. You can tell it is three dimensional simply by running your finger across it, but even conceptually, bas (or low) relief, by definition, means it has depth, i.e., it is three dimensional. However, my adversary, a woman I worked with found some Google entries saying it is two dimensional (which is easy to find, because many people believe it is two dimensional – the cool thing about bas-relief is that because the relief is so low, it has characteristics making it appear two and three dimensional at the same time – but, it is “low” relief, not “no” relief). I soon learned that thinking was not required or even permitted in the argument. You just finding a supporting webpage on Google and you win.

Just as another example, earlier this year, I had an argument with a friend over whether Governor Rod Blagojevich had been indicted. I knew he had not, but was immediately shown by a bewildering number of Google hits that he had been indicted. I admit, I was stunned because I was so sure. One Google squib could be wrong, but so many? Actually, yes. When I went to the webpage created by the actual U.S. Attorney who would be indicting him, he wrote that despite the fact that so many news outlets had reported Glagojevich was indicted, he wasn’t yet, merely arrested (he has since been indicted and will likely be tried next year).

At least, with my debating partner there, my one authority was more convincing than his many and he acquiesced. I am not always so lucky.

But, again, these are examples. I have had this same problem many times. So have you. In fact, though aware of it, Google and Wikipedia are my first visits when I am wondering about something and if the article appears authoritative, particularly Wikipedia, I usually believe it, although I am much more cynical by nature than most and do spend a lot of time fact checking. That's because they are, in fact, wonderful tools.

To be sure, I'm not damning the internet here, which has brought me personally in contact with knowledge from texts and works of art to which in my whole life I never would have been able to have access to otherwise.

It may seem to you that I have wandered far afield, from money to knowledge. But, money I define slightly differently than dictionaries do, as the medium by which we manage the exchange of goods and services in our society by substituting a standard for knowledge of value and other knowledge. Because if civilization means anything (and definitions vary), it must contain some agreement on the way we manage our lives and the economy. When that fails, everything fails.

This has happened before when technology or situations changed the world faster than people or society could assimilate. One example of monetary failure in the past is eerily similar to that which we are now experiencing. During the Civil War era the Southern States, dedicated to individual state power, in some sense set up the first all-powerful central government in America, predating what our victorious central government would do in 1913 by forming the Federal Reserve Bank system. They set up their own system of money, and because they did not have the gold or other accepted unit of trade backing it, they just kept printing more and more until it was essentially valueless. The Confederate economy collapsed.  It is the reason the Confederacy could not survive against northern aggression (for you Confederate-philes, that is not a discussion of who started the war, but a description of most of the action).

Right now in congress, one senator from New Hampshire, Bernie Sanders, an independent but essentially left-wing socialist, and Ron Paul, a Republican congressman, but essentially right-wing conservative/libertarian, are both demanding some accountability and transparency of the Federal Exchange, the giant bank that creates money and does whatever it wants, as if it were a monarchy unto itself, unbothered by either the administration or congress, who can merely change who runs it, but not moderate or control it under prevailing rules. It is now the most powerful branch of government, never having been conceived at all by the forefathers in the constitution.

So much for a representative government.

I’ve read Paul’s End the Fed, and, despite a couple of quarrels I have with it as to his solutions (essentially, go back on the gold standard, get rid of the Fed, the FDIC and the like) it is an important and very easy to understand book. For me, who enjoys dancing on the precipice of our cultural norms and shouting out “The emperor has no clothes,” it is a simple rendition of our national (and to some extent, world wide) fantasy as to the meaning of money that I’ve been haltingly and poorly trying to understand since the late 80s. For others, who prefer the sanity of believing every thing will be fine and who do not engage in windmill chasing, his book might be a little too much of an eye opener and frightening. Better to classify it and him as crazy as did his opponents in the presidential debates last year. Paul does not claim to have originated any of his claims, but he is an exponent of the Austrian school of economics which I have written about here a little in discussing Friedrich von Hayek (just put Hayek into the search box above for the articles mentioning him), who himself was a student of Ludwig von Mises.

No, this is not an anti-technology screed. But, it is a warning that the societal agreements we have as to money in particular, is in danger of becoming untenable as the government strays farther and farther from the rules and restrictions that has governed it and stretches our willingness to suspend disbelief (which is immense) to the breaking point.

I said at the outset of this post that I would try and frighten you and that I would fail. Thus, at least, I have succeeded in my failure, one of the great benefits of pessism so often overlooked.

Call me Cassandra and then go back to sleep, Neo. Everything will be fine.

2 comments:

  1. Dear God,
    Please give my friend David a job. He really needs something to do, as he gets easily distracted. My friend is at the age where his mind gets stuck in a loop, like a computer, and just keeps going round and round until someone comes along and smacks him in the head. Despite this, he is a really nice person, in fact, he's too damned nice, so he really needs your help. Lions can take care of themselves. Thank you very much, your humble servant, Bear

    ReplyDelete
  2. "The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false."

    By historian, Paul Johnson

    So, there.

    ReplyDelete

Your comments are welcome.

About Me

My photo
I started this blog in September, 2006. Mostly, it is where I can talk about things that interest me, which I otherwise don't get to do all that much, about some remarkable people who should not be forgotten, philosophy and theories (like Don Foster's on who wrote A Visit From St. Nicholas and my own on whether Santa is mostly derived from a Norse god) and analysis of issues that concern me. Often it is about books. I try to quote accurately and to say when I am paraphrasing (more and more). Sometimes I blow the first name of even very famous people, often entertainers. I'm much better at history, but once in a while I see I have written something I later learned was not true. Sometimes I fix them, sometimes not. My worst mistake was writing that Beethoven went blind, when he actually went deaf. Feel free to point out an error. I either leave in the mistake, or, if I clean it up, the comment pointing it out. From time to time I do clean up grammar in old posts as, over time I have become more conventional in my grammar, and I very often write these when I am falling asleep and just make dumb mistakes. It be nice to have an editor, but . . . .