Debt, Finance & Money

Yesterday, the dollar traded at an “all time low.” Everyone drops context when they claim, as you can find in all sorts of places, that since the creation of the Fed in 1913, the dollar has “lost 90% of its purchasing power.”

Oh really?

Now, the only thing that can possibly mean in practical relevant terms is that average people in 1913 had the power to purchase goods and services to sustain and improve their lives in magnitudes 10 times greater than we do today. Is that the case? Or is it rather the case, perhaps, that the dollar was inflated 1000% since 1913 and the credit from that inflation has purchased industrialization, technology, and economies of scale that give you 10,000% the purchasing power of a 1913 individual? My percentages are for illustration. Hopefully you get the point. Think about it. When you secure credit, such as to buy a house, you’re inflating your own net worth. But you’re also leveraging it, and when you do it with some thought and cleverness, the bounty from the leverage far outweighs the inflation. It works the same way on a macro scale.

I’m no particular fan of the Fed, for reasons I’ve explained. But let’s keep a bit of perspective, shall we? The simple fact of the matter is that you can participate in the financial economy, such as it is, and you can become very wealthy. Having tokens (a gold standard) in place of “money out of thin air” credit is not going to help you to become wealthy, if such is in any way one of your objectives. It will help you to retain the relative value of your money if you choose to stuff it in a mattress for a rainy day and sit on your ass for the rest of your life. That’s about it.

The “gold standard” is for chipmunks.

Yea, I understand and somewhat sympathize with the objection that the financial system is a rigged mechanism (by government) that favors the very clever (bankers, financial institutions, and so on). This is true. It’s much like “capitalism” (such as it’s practiced). You’ve got to have brains, a bit of luck, and a bit of persistence, and still there’s no guarantee (you can work in a job or put your money in t-bills or the like). But these objections strike me as not essentially different from the leftie and commie objections to capitalism and big business. Yet libertarians generally defend capitalism and big business, understanding that while the government messes it all up with its protectionism and favoritism, it’s better than more protectionism and favoritism, and certainly better than some primitive artisan-organic-style “industry.” Same goes for credit. Tokens (or warehouse receipts of same), no matter what rare metal they’re made from, are going to get you no leverage. Yea, safe (whoopee!), but with no flexibility and zero sophistication. Without the state, brains, luck, and persistence will still be required to make a go of it in business, and one would hope that financial technology would advance beyond beads and tokens, offering true (not hard — token — money) debt leverage for the more sophisticated and risk accepting.

There is no reason in the world that money ought to itself be a store of value, which is what the gold bugs really seek. It’s a commonly accepted medium of exchange that fluctuates relative to other values, just as other values fluctuate relative to one another. There are plenty of ways to store value. Money should be whatever thinking people can make it into, just as in all forms of technological advancement.

By the way; I’ve never read an economics book in my life beyond some chapters of textbooks in college, and I’ve never gone about spending much time delving into the Austrian School. I know enough about it to understand that they have essentially the right view of free markets, but I don’t think I need to spend a second on their arguments for a token monetary policy (I’m probably over-characterizing it). I often wonder if libertarians who study that stuff ever actually stop to take a look outside the laboratory and classroom.

I believe that sitting and working out for myself — in my own mind — how monetary policy actually really works has given me a deeper understanding than I see evidenced most everywhere else, much of which amounts to the regurgitation of various catechisms.

The definitive point came to me about 10 years ago. I asked myself a simple question — already knowing that when you get credit from a banking institution (as opposed to a “hard money” loan), the bank is essentially creating money (it pays the prime rate for the money it creates, charges you a markup rate, and keeps the difference). The question: what is that created money, really? Before I answer, it has been my observation (by no means exhaustive) that libertarians stop right there, wishing to think no further. “The bank created money out of thin air, backed by only a pittance of hard money (reserve requirement).” But is it, really? For one, much of the money it creates and lends is secured by various hard assets (construction projects, assembly lines, houses, cars, boats, airplanes). But what is it, beyond that? I came up with my own answer, and perhaps it’s been stated before by others but it was completely original for me. When a bank loans you money, you are borrowing money. But you can also say that the bank is buying something from you, and you are selling something to the bank. What? The bank is buying, and you are selling, a portion of your future productivity. Your reputation has a value to the bank. They can see that you live up to your promises and they can make money by “investing in your stock” as a human being. You, in exchange for the convenience and advantage of having a good or service now, or having capital you can leverage into a business or other investment, sell your future productivity at a discount, i.e., you have to produce more than the amount you borrowed.

And free marketers ought to be able to take it from here to understand all the multiplier effects that spill (not trickle down) throughout the economy, and what those directly produced things lead to, and so on.

We sit around and lament that other countries finance our national debt. They buy treasury bonds, we pay interest. Now I’m not defending the state, but what I’m saying is that if there was no state, I would sure as hell hope that our economy was strong enough to create tons of money through private endeavors, and that foreign investors would help to finance it. Given the nature of the economy, as it is, it’s a wonderful and impressive thing that other countries finance so much of the debt. Have you ever stopped to ask yourself why? What do you suppose they have to gain?

A final point is that no token economy is going to protect us from financial ruin. Things can go to hell in a hand basket for any number of reasons and when that happens you’ll be hard pressed to protect your assets. But if I ever have to start all over, I sure want to do it in an environment where I can take on financial leverage, which means a non-hard-money, non-token economy with fractional reserve banking.


  1. James Pruitt on September 28, 2007 at 06:16

    Interesting notion you have here and one that I struggle with from time to time (that is, when I actually take time to think about it). A similar point was made to me, about the gold standard, by an Econ. prof. at a community college in Roanoke, VA (way back when) that money is just a convenient medium of exchange and does not really matter what the backing, as long as people accept its value.

    However, after reading your post, I do have to question, then, if the notion of inflation is given more importance that what it may deserve or if even really valid in modern economic discussion? As you mention, the purchasing power of a dollar may have fallen, but it seems that we really do get way more for our dollars now.

    Yeah, a house may have only cost $1500 vs. $200K now, but seems to be a lot more home ownership today. Granted, ease of credit affects this, but is that all just part of how dynamic the system has become. Yeah, there are risky loans made, but I , personally, don't know anyone who's lost their home.

    Anyway, just a thought.

  2. Richard Nikoley on September 28, 2007 at 17:57


    The chief problem with inflation, in my view, is that it harms people who either don't in any way invest their cash, or do so in such a prudent manner that they don't overcome inflation.

    Otherwise, I view dollars as just another security that fluctuates in value relative to other securities. But yea, I think it's given too much play, at least in a net growing economy. And keep in mind: net growing, which means that in spite of some companies and industries going down the tubes, the growth in fresh new companies and industries is making up for it, and then some. And the fact that they are new and fresh adds a whole new dimension in opportunities and possibilities.

    It's probably true that a lot of this current inflation is caused by the high cost of the war and the government is likely monetizing some of that cost. That's a problem, unless of course a near term stable Iraq helps lead to great economic development in the Middle East which benefits us medium term far more than the cost of the war. Not holding my breath.

    Otherwise, inflation caused only by credit expansion, so long as that expansion is financing net growth (and I include home ownership in that, chiefly because of new construction) is not only not problematic in my book, it's really a great thing.

    Those who lament the bursting bubble now ought to take comfort that the market is treating it exactly as it should; lenders found the limits of what they could do, and are pulling back.

    This is a continual problem. People don't understand how business operates. Businesses don't sit around and decide what's prudent for people to borrow. They try things and see what works. The loose credit worked very well, up to a point, and now everyone better understands the limit. Once the lesson is forgotten, then we'll have another credit bubble. And if it happens in my lifetime, I'll see it coming and make even more than I made in the last one in real estate.

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