Tuesday, November 25, 2008


Today's economy is built on a principle of confidence. We currently have a form of fiat currency -- which are "types of currency or money whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government's order (fiat) that it must be accepted as a means of payment." (Wikipedia, Fiat Currency) During WWI, specie money and fiat money came into direct conflict. Instead of backing every note with a certain amount of precious metal (or specie), money instead started to be based on a country's (or indeed individual's) confidence that the issuing government could back the note. This eventually lead to hyperinflation of money. The ensuing financial melee became known as the "Great Depression" and afterwards WWII forced an international framework based on wholesale gold bullion (think Fort Knox) known as the Bretton Woods framework or system.

Under the Bretton Woods Framework, the value of the United States dollar became 1/35th of a troy ounce -- The Gold Standard. Dollars could not be redeemed by individuals for this gold, only other countries could ask for that gold. Each country's currency had their equivalent gold standards and there was additionally an International Monetary Fund who could assist equalizing trade imbalances. We were all tied together.

This was fine for a while, but the US began to build both internal and international debt. Each year for the last 50+ years, our government has spent more money that it has budgeted. We now not only have a budget deficit, but a national debt that is so very large that I personally cannot comprehend it. It amounts to around $36K per person in the United States. Who got us here? Both the Democrats and the Republicans. Each would like to cast aspersions on each other -- but they are both to blame.

What has seemingly made it worse is the abandonment of the Gold Standard. You see, in the very early '70s, France wanted gold for the money we owed them. However, we did not have the gold in the reserves to pay them -- however we NEVER have had specie to cover our banknotes. -- n ot even from the very beginning. Although we called it a "Silver Standard" in 1789 and a "Gold Standard" in 1945, it has always been fiat money.

But we had the illusion of gold backing our money and confidence in that system. In 1971, when we abandoned the Bretton Woods system, the value of the dollar fell and gold prices rose -- as a show of the lack of confidence in the American dollar.

It is so very easy to point to Bush's economic policies and cry wolf -- or to Reaganomics, or to Clinton's Mortgage Bill, or to Carter's push for easier mortgages or to Nixon's abandonment of the Bretton Woods Framework, or JFK's tipping the balance on the National Debt. Easy to point fingers, but each were culpable. This is not an easy problem -- there are no easy solutions. A better question would be this -- has there EVER been a truly stable economic system in the history of humankind?

What are we then to do? We need to build confidence -- starting at home. We need to pay our bills and show our creditors our integrity. We need to work our jobs -- if we have them. We need to dispose of all revolving debt. We need to live within our means. How can we expect our country to balance a budget and reduce our national debt when as individuals we cannot balance our own checkbooks or reduce our own crushing debt load?

I understand that if the consumer doesn't consume, then people will suffer -- we have so ingrained conspicuous consumption in our collective psyche, that we have people creating products that we honestly don't need and can't afford. Do we really need a "redistribution of wealth" so that we can waste money on bigger and bigger plasma TVs, more clothing than we can stuff in our closets, bigger and faster automobiles and consume our way to perdition?

As a people and as a nation, we need to look hard at how we are spending our money. We need to examine our purchases and determine if it is a "want" or a "need." The pundits on the radio this morning were predicting the demise of the United States within two years. I say that we need to look deep within ourselves and see how we each can do something to help create confidence. We need to look at our system of taxation and see if there is some better way (of course, I'm thinking in particular of the Fair Tax. *(another note: please do not think that I am a fan of all the politicians that appear on that website -- I'm a fan of the concept because economically it makes sense.)) We need to look at the government's spending and ask the Wesleyan questions: Are we making all the money we can without it becoming usury? Are we saving all the money that we can? Are we giving as generously as we can? What would it mean if a nation asked these questions of itself?

I think these next few months should be months of introspection as a nation. I think that will be my prayer.

*I'm not going to argue about the Fair Tax right now -- it is NOT an additional 23 percent on top of what we are already paying. The taxes that it abolishes are hidden in the price of the goods and thus the take-home price of goods will remain much the same.

No comments: