Sunday, May 23, 2010

The Decline of Money

By means of a constant barrage of propaganda from banks and government, we are brought to believe that money is something of intrinsic value, that it is essential to life as we know it, and that our livelihood utterly depends on acquiring, keeping and spending money. I’m not talking about dollars, or euros, or yen or pesos, or any particular currency, I’m talking about the whole idea of money, the concept that a monetary reality underpins the world’s economy.

It’s an illusion and a lie.

I will show you that even if the dollar collapses, as the doomsayers predict, the world will not stop turning. This is the stuff of revolution. If you understand this, you will not be panicked by talk of banking collapse, or spiraling debt. You will understand that you are the target of a very special kind of brainwashing.

You can’t eat money, drink money, dress your kids in money, or build a house out of money. Everyone knows that. So how did we come to worry so much about money, debt, prices, banking, monetary fluctuations, inflation/deflation – how did we construct the whole panoply of measurements, indicators, mortgages, interest rates, etc. - the whole baggage of money - an illusion so complete it actually seems to have replaced the underlying reality?

The Underlying Reality

An economy is the sum of the real transactions in it, no more, no less. We swap labor for food and housing and transportation. Those are real economic transactions. Companies swap finished products for office supplies, rent, workers labor and raw materials. Markets are places where iron is swapped for sides of beef, where cars are exchanged for bushels of wheat. These necessary transactions are the beating heart of the commerce that supports civilization. If money were to disappear tomorrow, we would still be manufacturing, mining, eating, inventing new things, programming computers and doing genetic engineering. We would not be doing them for dollars if there were no dollars. We might be doing them based on the value of an average person’s labor, or a bushel of wheat. So a car would still be valued at some denominator, say, 1000 labor hours or 400 bushels of wheat.

What we have done is created a denominator – money - that can be converted into almost anything. But this money is no more real than the units on a calculator. The conversions – we call them prices – change. Mostly they go up – we call this inflation. In other units, say bushels of wheat, they are pretty steady. In still others, say ounces of gold, they may decline. Why choose money as the ruler for measuring worth?

What is the best and most useful denominator for economic transactions? This has been a subject of argument among economists since there were economists.

The short answer is that the best denominator is one that everyone is willing to accept in trade. It could be cowry shells or coinage, obligations to repay in kind or promises to perform services over time. The more universal the acceptance, the more useful the currency. Historically, currencies have competed for acceptance, and the most acceptable drives out the less acceptable. Right now the US is trying to create a currency - the carbon credit – by making it an acceptable form of payment for a new tax on carbon emissions. That is a fine example of how easy it is to create money.

The Devil’s Invention

It can be a bit clumsy to exchange what you produce for all the things you need by direct bartering, but it is not impossible. However, by getting you to rely on an intervening kind of money for every transaction, the issuer of that money gains tremendous advantage. Because the relation between the money and the real underlying transactions is not obvious, the money can be manipulated. Holding money can be taxed by inventing interest rates. The larger holders of money need no longer produce anything. They just collect interest on the money they loan out. Most important, money is the most convenient base for taxes. Finally, fractional reserve banking allows the holders and loaners of money to actually create money from nothing. Fractional reserve banking and interest are the most common and insidious means of manipulating money.

When a government gets involved in creating a money monopoly, setting interest rates, outlawing competition, forcing taxes to be paid in its official currency, regulating and controlling the expansion of money through a central banking system, and issuing debt based on that money, it establishes itself as a silent partner in every exchange. Monetary control becomes the essence of that government. It will then pursue every avenue to extend and maintain that control. History is full of excellent examples of this – wars fought over gold from the New World, the introduction of central banking to England by Maier Rothschild as a precondition to war loans, the recurrent fuss over balance of payments and the value of the Chinese yuan. All of these are power grabs by the money monkeys.

The Commercial Sphere as a Parameter Space

There does not need to be any intrinsic value in currency. It is simply an acceptable marker for an exchange transaction. That’s where the gold bugs go wrong. Gold does have limited utility for exchange inasmuch as it can be used as an industrial metal in electronics and jewelry. However, the value of a Troy ounce of gold is established primarily by the willingness of someone else to exchange goods and service for it, not by any kind of intrinsic value. When you can by a good cow for two ounces of gold, that does not establish the value of the cow, it establishes the value of two ounces of gold. The idea that there is something magical in the medium of exchange is the illusion. It’s just a yardstick, no better than any other yardstick so long as it is accepted in exchange.

Imagine commerce as a huge transparent sphere. All commerce is contained as a series of exchanges in the interior of the sphere among various goods and services. In the very center of this commercial sphere is a powerful light that casts shadows of all these transactions on the surface of the sphere. The nature of this light is that it only casts shadows of the relative exchange values, not the actual goods and services being exchanged. Every transaction casts a pattern of dots and symbols that accurately captures the relative value of the transaction. The surface of this sphere of commerce, then, is a vast pattern that captures all the transactions within in it in a universal but abstract form. Mathematicians would call the surface of this sphere a parameter space.

On the surface of the sphere all media of exchange can be represented. Dots with a $ sign are exchanges denominated by US dollars. Likewise, we can see riyals, renminbis, zlotys and rubles where they are used in various exchanges. When a cow is exchanged for zlotys and another is exchanged for dollars, we can then calculate an exchange rate for zlotys to dollars and vice versa. Keep in mind that the cow is a real cow, and the currencies are just projections caused by this special light in the middle of the sphere.

Over time, we might see that at one instant more and more people are accepting dollars than rubles, so that dollars are becoming more universal. We might also see that more and more kinds of goods and services are being denominated in dollars, therefore eventually we would expect dollars to be almost universally accepted as a denominator for cows and milk and cheese and butter and, spreading outward, for eggs and coffee, and eventually for cars and computers. People will rarely swap cows for computers, but they can easily compute a cow as being a good swap for a high-end computer using the information encoded on the surface of the sphere.

From Currency to Money

Anyone can create money. All you have to do is issue some evidence of the money, protect it from being counterfeited, and convince people to use it in exchanges. If you create a lot of it, it will take more to buy a cow. If you keep it scarce, it will take less to buy a cow. The cow stays the same, the money goes up and down.

I used to mow lawns for gasoline. I would mow your lawn if you filled up my car. That way I could have gas to take my girl friend on a Saturday night date. Half a century later that is still a reasonable deal – one lawn mowing for a tank of gas. No comment on the girl.

The utility of currency is convenience and universality. If you can use dollars to buy both cows and cars, I will prefer to carry dollars rather than Ford Credit Coupons, which are good only for cars.

In order for a currency to be useful it must be portable, accessible and transferable, things that gold is not. Getting cash from an ATM is a very good example of why money is useful. Wire transfers, bills in various denominations and checking accounts are distribution means intended to increase the utility of money. In fact, anything that increases the utility of money favors that currency over others of less utility. No one really cares whether a cow costs 25,000 pesos or 2,500 dollars or 250,000 yen – it’s the same cow. The cow is the real object, not the money.

Remember, the money has no intrinsic value. It’s just a measuring stick, a convenience we can carry in our pocket for many kinds of exchange.

What if somehow money is not trusted, or not completely trusted? What if the money we put in our bank account to buy a cow was perfectly acceptable when we banked it, but the farmer won’t take it now for his cow, or perhaps he wants more of it because he found some exchanges that took more money to buy a cow? You can easily see that the value of money will fluctuate with people’s confidence. If the issuer is consistently creating more money than can be used in transactions, it will be worth less. That is the definition of inflation. It isn’t the printing of the money that causes the inflation, it’s the decreasing confidence people have in it. Specialists who keep watch over the patterns on the outside of the sphere will call the alarm. They are called economists. Bankers listen to them and the rest of us follow along. Sometimes we make a bank run. Some of us are still holding Confederate money in case the South rises again.

Let’s extend that concept of a universal measuring stick.

The Uni, an Ultimate Fiat Money

Suppose we possess an enormously powerful computer and the means to capture all the real transactions in the sphere of commerce. We analyze them. We find some universal basket of transactions that represents the underlying values of things. It could be twelve bushels of wheat, two barrels of heating oil, 10 hours of average labor, half a cow, ten percent of a standard house, 100 kilowatts of electricity and five chickens. How did we decide the contents of this basket? We picked exchanges that changed little over time, goods that were global, things that were universally valued, and things that were pretty fundamental to human existence. Lets call this universal basket of value the Uni. Now, having all this wonderful data and the supporting analysis, some clever government decides to issue currency based on the Uni. Unis take over all trade. The entire banking distribution system now runs on Unis. You can buy anything with Unis.

The World Government strictly controls the value of Unis so they never get ahead of World Production. They also never get behind, because the same compute system that generated them always makes sure that the supply of Unis expands and contracts with the size of the sphere of commerce. Unis are so cleverly made they cannot be counterfeited. Price are steady for while.

Yes, we have a fiat currency, but it is the ultimate fiat currency. It is created by government fiat and has absolutely no intrinsic value. The underlying basket of goods DOES have an intrinsic value, however, unlike gold or dollar bills. In fact, it is the best intrinsic value anyone can devise. Steady prices, no political intervention in the value of the Uni, no artificial shortage of money, banks charge only economic interest rates (more on this later) on loans, the Forex is dead, currency speculators have all starved out or gone into the dot com market. We should be in monetary heaven, right?

One day there is a rumor that nuclear fusion has been made to work and is so cheap that oil is now dead and electricity costs less than a phone call. Remember when phone calls used be expensive? Since the Uni is based on both expensive electricity and expensive fuel oil, it’s no longer stable. There is a sudden rush on capital goods that use electricity and they are now in short supply and getting expensive. The world’s largest companies, the national oil companies, begin to die off. Saudi Arabia faces bankruptcy. Speculation in banking instruments based on the Uni explodes and the shrewd money shorts those instruments. We are back in the boom-or-bust market cycle where we started from until the markets clear and the Uni basket is readjusted for a new collection of goods and services. Confidence in the Uni is shaken, but is slowly restored in months or years.

Then a chicken virus destroys the chicken stock – back to square one again. Confidence in the Uni is shaken one more. It takes longer to come back this time. Then the government decides to regulate the ownership of cars to reduce congestion and prevent unplanned population migrations. The auto industry and personal transportation collapse, disparate local labor market develop widely varying wages because people cannot get to jobs by car anymore, and we are once more in a recession. The local market stop paying in highly taxed Unis and employers issue their own scrip, just like California did for their public employees in 2007.

Inevitable Monetary Collapse

Here is the lesson: there is no such thing as a stable currency. There is no such thing as a stable dollar. There never will be. Even theoretically, there is no way to create anything but a fiat currency. Since the value of money depends on the willingness of people to accept it in economic exchanges, and since the very nature of economic exchanges is highly dynamic, there is no way to make money have any kind of intrinsic value, even if we use gold or Unis.

Furthermore, we are very far from the economic equilibrium of the Uni world. Every developed nation is bankrupt if you consider the aggregate debt and include unfunded pensions and entitlements. These debts are estimated at 4 quadrillion dollars, about five time gross world production. That means that the fiat value of the world’s currency is five times as high as it should be to reflect the underlying transactions in the volume of the economic sphere.

If you focus on the illusion of money, what you will see is an image of inevitable global disaster.

We are saddled with institutions that have fostered the expansion of debt and pursued money as if it were something that was as vital as air. Banks and financial institutions have co-opted the governments of every developed nation. Their survival is entirely based on the illusion of the intrinsic value of money. While a human being can only eat so much, wear so much jewelry and live so long, there is no limit to the accumulation of money. Money monkeys live for the accumulation of money. With the collusion of the courts and governments they have instituted such practices as fractional reserve banking, institutional interest rates, credit scores and a vast industry of taxation and debt collection to convince us that we are fundamentally dependent on them. Rather than bringing the system into equilibrium, like in the Uni model, they have kicked the ball down the road for centuries, piling interest on top of debt, creating new money out of debt, building structural inflation into the fiat currency so that it can never be paid off or brought into balance.

Regulating the Illusion

Government can put quotas on goods and services, provide incentives to increase the supply or the demand of critical goods, such as steel production in World War II. But this is rarely done. Government is concerned with taxes, not goods, and therefore it is very concerned about the ebbs and flows of money. When government gets concerned it enacts regulations.

Since we know there is no real way to regulate the illusion of fiat money, and it is far too late to put money back into balance with the economic sphere, what does government hope to accomplish by regulating money? Nevertheless they will always add some new layer of regulation on money or it’s derivatives, which includes a panoply of bonds, notes, mortgages, CDO’s and debt swaps, reserve ratios, and credit card fees, and make obscure rules for the institutions that handle these kinds of money.

Government has three objectives: First, they will always try to increase the power of government and to strengthen centralized control over money, which includes having politicians trying to look good and trying to appear to be in control. Second, they are trying to re-instill confidence in money, continually selling us the idea that new regulations will somehow fix the instability which is fundamental to the notion of fiat money in the first place. Third, they are trying to surreptitiously kick the ball further down the road, to prevent the imminent collapse even if the regulation makes the fundamental imbalance much worse.

Not many politicians really understand what they are doing. They consult staffers and call in expert testimony from among those least likely to explain what is really going on. They get embroiled in alternatives with no real impact on the observable problems. Politicians are as pathetically naïve about money as the average Joe. After a great show of heat and light the regulations will accomplish nothing to resolve the underlying imbalance between money and the sum of activities in the commercial sphere.

Scrip Exchanges

When the Unites States was founded, there was no “strong” currency. The “Continental” currency was a joke. Banks and businesses issued their own scrip and often businesses ran their own “company store” where employees could buy basic goods in direct exchange for their services. Because there was no way to establish the real value of a scrip across a significant sample of such exchanges, most of the time the exchanges were weighted in favor of the bigger player – the bank or the company. Of course, people caught on and the practice died when better alternatives became available. Since people believed in gold and silver, that became the basis of money. When this became unsupportable, the USA went to “Federal Reserve Notes” and called in all the gold to Fort Knox. The paper dollar is now based on the “full faith and credit of the United States of America” which means your tax dollars and little else.

With the advent of computers and data gathering, we can now do a much better job of finding the best exchanges.

Imagine a sort of combination of Ebay and Craig’s List, where you can look up a fair rate of exchange between the scrip your employer issued last week for your pay and the scrip Walmart now issues to their employees. Walmart accepts their own scrip for whatever is on their shelves. You look it up and go to a local scrip exchange. That would be the old Citibank building, but it is now a local or regional business since Citibank died in the last money decline. They will not give you the same rate as you saw on Craig’s List. They will charge a bit more. However, if you fish around you will find the best, or at least an acceptable rate. They take your employer’s scrip and give you an electronic card, essentially a debit card. On that card are several scrip limits for each one you order.

You go to Walmart and fill up your shopping cart, just as you do now. You present your bank card and the value of the scrip is deducted. You may ask for change, which will, of course, be issued in Walmart scrip. So far, except for the trip to the scrip exchange for the physical paper scrip, nothing much has changed. Your employer may have electronic payment so you don’t even have to exchange any paper.

At the end of the day, Walmart sends its aggregated receipts in its various scrips to the various scrip exchanges for settlement at agreed rates. It keeps its books and balance sheet in Walmart scrip denominations. This is not much different from what happens with Visa, Mastercard and American Distress card payments today.

Because all these scrips are subject to the failure of their issuers, and the scrip exchange must keep some reserves of all the scrips they can exchange, there is risk. The exchanges cover this risk by the extra fees they charge and the insurance they purchase from specialized insurance companies, who are the scrip-world versions of the credit rating bureaus, but with a real stake in the outcome of their ratings.

Is this a neater monetary vision than the Uni? It’s messier. It’s decentralized. There is no single handle by which a government can manipulate the entire system. It’s very capitalistic, in that supply and demand are the balancing forces, and when a scrip fails, there is no bailout. The market clears and we go on. It is very robust, in that there is no central point of failure.

So why are the money monkeys shouting “disaster and collapse” from the treetops?

Pricking the Bubble

They don’t do this just out of greed. They are terrified that you will find out just how fragile this balloon of fiat money really is, and that you have the power to prick the bubble.

Suppose a major currency, like the dollar, goes the way of Greece and no reasonable investor will support it. China will try to cash out its US debt. Saudi Arabia will no longer trade oil for dollars. Unlike the situation in Greece, there is not enough financial muscle in the IMF or the Federal Reserve to bail us out. In fact, the only thing the rest of the world can possibly do is prop up the dollar for a short time and hope the storm of confidence passes. Eventually, even this ploy will fail. The US will repudiate the debt, bringing down the currency essentially to zero. This scenario could happen in Europe, Russia, Japan or Brazil, and possibly even in South Korea and the net result would be the same. Now you know what the big topic of discussion is at those Bilderberger meetings. Some of them are frightened half to death and the others are trying to figure our how to make it happen and take a profit.

The US economy is unique. Consumer transactions are 70% of the US economy. Other nations are primarily based on oil or other commodities, on cheap labor exports, on centrally planned economies that do not depend on consumer choices. If US consumers lose too many paying jobs and they do not buy goods and services , our economy suffers real loss, not just money numbers. Likewise, in good times when people are working and factories are humming, consumers still have the power to make or break any commodity or market, even the dollar. A run on the dollar, supported by local alternative scrips or bank notes has happened more than once in our history.

It could happen again.

I believe that if the US goes bankrupt through the manipulations of the financial sector or the inept actions of government, every local bank and state government will issue scrip and notes, all fiat money of course, and they will once more compete for the confidence of the productive class. Since entitlements are really transfer payments from a taxpayer’s pocket to a recipient, they would cease, along with the taxes that they came from. This would mean the end of the big financial institutions, the money monkeys and the Central Bank, and that might be a good thing in the long run.

But in the sphere of real commerce, a cow will still be a cow.


  1. hey snow man, where the hell have you been? you entertained my brain for most of the night....bravo!!!

  2. hey flake boy i just sat up most of the night reading your blog......bravo!!!!