Sunday, May 9, 2010

Postmodern Economics

Postmodern Economics

As a libertarian, I realize that money, in order to have any real value, needs to have intrinsic worth—like gold or silver. As a medium of exchange (i.e., money), gold and silver have intrinsic worth, because we can use it for purposes other than as a medium of exchange. For example, we can make jewelry out of it, which adds artistic value to the intrinsic value of the metal itself. Sound money provides a sound basis for an economy. But the US economy is not sound, because it's been off the gold standard for many years. The question we need to ask is: "Why has the US economy gone off the gold standard?" Other important questions we need to answer are: "Was it reasonable for the US to go off the gold standard?" "Is it reasonable for the US to return to the gold standard?" and if it's not reasonable, "What, then, are we to do?"

During the Civil War, the federal government issued $450 million dollars worth of paper money that was not backed by (i.e., redeemable for) gold. Economically speaking, this was a very unsound policy, because paper money lacks the intrinsic worth of gold, but the federal government needed a way to finance its (Union) army without exhausting its gold reserves.

The 1890's saw the rise of the Populist movement, consisting mostly of farmers and others who were in debt, mostly of the working class. The movement sought a way to free themselves from their economic servitude to the wealthy class, those who had lent them money: the big Wall Street bankers. The Populist wanted cheap (non gold-backed) money—paper (greenbacks) and free (or much cheaper than gold) silver—in order for them to be able to pay back their debts more easily.

Wall Street balked at this because, being in the money business, the bankers knew that the issuance of such cheap money would allow their debtors to pay back their loans with money that was worth much less than the money they had been lent by the banks.

The same situation is occurring today. The Federal Reserve treats paper money (fiat currency) as if it were backed by gold, even though it's not, meaning that the Fed keeps a tight rein on the money supply in order to benefit Wall Street bankers and investors. If a movement similar to the Populist's rose up today—debtors seeking an easier way to repay their creditors with money that was worth less than the money they had borrowed—we would see this movement clamoring for the Fed to monetize the debt (i.e., create money) and print more paper money. This would infuriate Wall Street, just as the Populist's demand for greenbacks and free silver did, because the Wall Street bankers and investor would lose money while their debtors gained it.

In my opinion, one important reason for the Populist clamor for greenbacks and free silver was the increase in US population and the westward expansion thereof. In short, the gold standard economy only works well when a nation has: 1) a large reserve of gold, and 2) a low-to-moderate sized population. Gold is valuable because it is scarce, and the Federal Reserve, acting as though paper money were gold, attempts to keep paper money scarce in order to maintain its value as a medium of exchange. Monetizing the debt and printing more money leads to inflation, which is a lowering of the money's value, and the Fed and its Wall Street partners try to avoid this situation at all costs. Doing so would deprive Wall Street and its investors of the value of the money it has lent, but it would allow those who find themselves in debt to repay their debts more easily by repaying those debts with inflated currency, meaning the money they repay their loans with is worth much less that than the money which they had actually borrowed.

Wall Street would hate this, but the people who are in debt would love it.

Population is, I think, an important—but often neglected—factor in economics. Consider the gold standard. There is, after all, a very limited supply of gold; it is scarce (a total (mined) of $4.5 trillion), hence its worth (besides its intrinsic value). The Fed, acting as though its tight control of the money supply duplicates the scarcity of gold, has not allowed the money supply to keep up with the dramatic increase in US population; thereby benefitting Wall Street and its investors but not the working-class (many of whom are out of work thanks the Fed, Wall Street, the Washington politicians, and their corporate friends, who have conspired together to outsource their jobs).

In 1787, when the US adopted the Constitution and was on the gold standard, the US population was somewhere around 3 million persons. By the 1890's, when the Populists began clamoring for the government to free-up the money supply via free silver and greenbacks, the population had risen to around 70 million persons. Today, the US population is over 300 million persons. Due to this dramatic rise in population, I don't think it's reasonable to assume that the US could ever return to the gold standard, nor do I think it's reasonable for the Fed to act as through it's still on the gold standard by keeping a tight rein on the money supply, which only benefits Wall Street lenders and its investors at the expense of the borrowers.

It would seem that postmodern (Keynesian) economics, which is the economic theory behind the modern government practice of creating fiat currency, borrowing on credit, and engaging in deficit spending, is unable to keep up with the times. It's beginning to look a lot like the old gold standard did by in the 1890's: there's just not enough money to go around.

In my opinion, the US government should make the Fed loosen the money supply, implement strong tariff protections for our nation's economy (in order to rid our nation of the flood of cheap goods from overseas (China), begin encouraging US corporations to rebuild their presence here in the US and start hiring US workers again, and put a freeze on immigration. This would at least be a good start, but I doubt that we will see anything like this. Most likely, the Fed will keep a tight hold on the money supply, deflating the currency as well as the value of what few assets the American people have (like homes), and encourage the Washington government to raise taxes and cut benefits; therefore we can expect to see more jobs lost and more businesses go under, with unemployment figures rising ever higher.

But the Wall Street bankers, their investors, the big corporate executives, and the Washington politicians will be happy, because they aren't feeling the impact of the economic crunch, like so many of the common people are. We're feeling the crunch.

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