The Meaning of Money

January 27, 2013 | By | 10 Replies More

I’ve often wondered how our economic system doesn’t self-destruct, given that the federal government has borrowed a huge percentage of the money it spends, year after year. This from the Washington Times:

The federal government borrowed 46 cents of every dollar it has spent so far in fiscal 2013, which began Oct. 1, according to the latest data the Congressional Budget Office released Friday. The government notched a $172 billion deficit in November, and is already nearly $300 billion in the hole through the first two months of fiscal year 2013, underscoring just how deep the government’s budget problems are as lawmakers try to negotiate a year-end deal to avoid a budgetary “fiscal cliff.”

At Reader Supported News, Carl Gibson of US Uncut describes our system as a huge ponzi scheme:

We live in a fiat currency system, meaning we can print an endless supply of dollars and not run up inflation, since the US dollar is the world’s reserve currency. Most of the paper money in circulation comes from fractional reserve banking, where banks lend out money they don’t have, which technically doesn’t exist, to anyone who applies for a loan. When banks loan this money, they do so with a promise of real wealth to be taken if the bank’s debt isn’t repaid by a specified deadline. While it costs the borrower all the real wealth they staked as collateral if they don’t pay back the debt owed to the bank, it costs the bank nothing to loan out the money they just created out of thin air. However, the bank turns a profit by collecting interest on these loans, regardless of the fact that they loaned out fictitious money. All commercial banks do this, hence why such a Ponzi scheme is legal. And US dollars are no longer backed by gold, so each dollar is essentially a note signifying debt owed to the private banks that control the Federal Reserve, which has been the sole issuer of US dollars since 1913.

Today, the Fed has lowered interest rates on our debt to 0% to keep the debt level artificially as low as possible to preserve the Ponzi scheme that the banks created with the signing of the Federal Reserve Act of 1913. The act states that the government must borrow money before the Fed can issue paper money, so if the interest rate was at 3% or 4%, the debt would soon rise to such an exponential level that the concept of paying it off would become laughable.

It’s hard for me to get my head around these facts, and these many other troubling facts about the economy.   I abhor the right wing “solution” to these issues, balancing this debt on the backs of the poor and working poor.   I don’t see any politician frankly discussing these issues, especially the dangers posed by running a massive debtor economy year after year.  I’ve heard many people suggest that running a country is not like running a household.  OK, why not?  Because we can print an endless supply of new fiat money?  Because the U.S. dollar is deemed the world’s fiat economy?  How much longer can that go on given the way we are printing money?  The only “solutions” I’ve seen are Enron accounting and little bandages on huge problems.


Category: Economy

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (10)

Trackback URL | Comments RSS Feed

  1. So the money system has turned from fact based (every dollar backed by real gold) into a religion (every dollar backed by just belief in it). It’s a mental control mechanism to direct vast streams of resources to wherever our “owners” (as uncle George called them) want them to go.

    Doesn’t this open the door to the rise of monetary atheism, the losing of belief in money? Maybe the Religion of Money simply has to go because it is the only way for people to become aware of which resources in this world are real, and which are fake.
    No doubt the believers in money will put up a bitter fight when this starts to happen, but that will just accelerate the Movement.

    If this were to happen the “real owners” will no doubt simply adapt by moving their goal posts and ride out an eventual storm. They have always been dealing in real resources anyway.

    I give money as we know it today another 100 years. After that it may well have become a specialist tool in economics, backed by real resources again. I can easily bet on that, because I will most certainly not be here by then 😉

    • Dan Klarmann says:

      Ah, the old fallacy that “real” money is gold. Back in olden times, before the invention of cities, gold had no value. Sure, it didn’t tarnish. But neither did it hold an edge, nor have any useful mechanical properties. Once urbanization happened, the bosses/lords/priests found value in pretty trinkets to exchange for favors. Gold is pretty, and moderately rare. A perfect token for value.
      By the time the Old Testament was written a couple of thousand years later, the notion of gold being not just valuable, but noble and god-like, was entrenched.
      But gold is still just a token of value, not the value itself. Proof that gold is as unstable as paper money is that its exchange value can bounce up and down so quickly in comparison to relatively stable currency like the U.S. dollar. In 1976, gold was about $150/oz. In 1989 it passed $700. A dollar still bought the same loaf of bread or fraction of a car. The gold price slowly relaxed down to $260 by Y2K (or $124 in 1980 money or loaves of bread) then shot up to $1800 in 2011 (or $660 in 1980 dollars or loaves).
      Gold is not more stable than paper “fiat” money as long as the public trusts the value tokens.
      Feel free to check the math:
      Historical Gold Prices
      Inflation calculator

    • Dan Klarmann says:

      When Europeans invaded and occupied the Americas, money over here was mostly shell beads backed by textiles and blocks of jade. Gold was just a pretty metal. This exchange system worked from what is now Brazil up to Canada.
      As the conquistadors plundered the locals, they freely gave up their gold and silver, but buried the jade and burned the textiles rather than let the invaders have them.
      Value tokens are an agreed upon system, not anything intrinsic to the token. That is, beyond direct commodity bartering.

  2. Jay B. says:

    Add in that by charging interest, more money is owed than exists, and you quickly realize all money is a lie and our society that’s based on it is a hoax. Fractional Reserve Banking is the dirty secret no one wants to know because it involves a little math and a hard look at ourselves.

    There isn’t much more leverage left to feed the growth monster, and the cracks are showing in the system. Neither the GOP or the DNC is ready to recreate the monetary system. It will require a real crash, the kind that Germany had to deal with after hyperinflation.

    There is enough labor and natural resources to keep our world livable. There is not, and will never be, enough interest bearing debt money.

  3. grumpypilgrim says:

    Actually, the amount of debt is not the main problem. A large amount of leverage is fine if the risk/return justifies it. The problem is that much of U.S. debt is being spent on consumption (military, debt interest, social services, etc.) rather than being invested for future returns (infrastructure, education, basic healthcare, etc.). To give an example: if you knew of an investment that would return, say, 8% and you could borrow at, say, 2%, then your best move would be to borrow as much as you possibly could (and invest it). However, if you instead planned to spend the money on consumption (cars, boats, parties, etc.), then borrowing huge amounts of money, even at the same 2% rate, would simply dig you into debt and would not be so prudent. The U.S. benefits from a (relatively) great credit rating that allows it to borrow at a very low rate. That’s great if the U.S. borrows and invests, and not so great if the U.S. merely borrows and consumes.

    • Edgar Montrose says:

      “[I]f you knew of an investment that would return, say, 8% and you could borrow at, say, 2%, then your best move would be to borrow as much as you possibly could (and invest it). However, if you instead planned to spend the money on consumption (cars, boats, parties, etc.), then borrowing huge amounts of money, even at the same 2% rate, would simply dig you into debt and would not be so prudent.”

      Alas; what we have is even worse than that: we have borrowed as much as we possibly could to spend on consumption, and now that we NEED to borrow for future returns, those who benefitted from the consumption won’t allow it. It’s a bit like mortgaging the house to be a high-roller at Vegas, losing everything, having a heart attack as a result, and then balking at the price of the ambulance ride.

  4. Ben says:

    This British documentary deals with the topic of money –>

  5. grumpypilgrim says:

    Concerning the statement, “We live in a fiat currency system, meaning we can print an endless supply of dollars and not run up inflation, since the US dollar is the world’s reserve currency.” That statement is not even remotely true. First of all, the British pound sterling, the European euro, the Japanese yen, the Swiss franc, and even the Canadian dollar are also considered reserve currencies. Some financial experts even predict the Chinese yuan will someday become a leading reserve currency, especially in Asia (i.e., if the Chinese government ever lifts its currency controls and allows market forces to value the yuan).

    Second, the U.S. cannot print an ‘endless supply’ of dollars without adverse consequences. Inflation is one, downgrading of the U.S. credit rating (as Standard & Poor’s did in 2011) is another.

    I’m not suggesting the U.S. debt situation is good, just that Carl Gibson’s explanation above is flawed.

  6. Ben says:

    I wish I was as optimistic as you folks.

  7. Niklaus Pfirsig says:

    Money has never had a set value.

    The problem is that in the industrialized world, people have no clue what money is and is not.

    Currency is not money. Neither are coins, or check or even numbers on an account sheet. Precious metals are not money. IOU’s are not money. Poker chips, wampum, scrip, coupons, green stamps, credits are not money either. These are all tokens representing money.

    What is money then? It is an agreed upon and often standardized unit of value that represents transferable obligations. Money derives it value solely from the price agreed on by parties in a transaction.

    The way we are trained to think of money is as a medium of exchange. Money is more than that. It is a virtual commodity that exists only as a representation of wealth.

    Most people in the US are so accustomed to preset pricing on goods and services that we would never think of negotiation (A.K.A. dickering, haggling, bargaining ) over the retail price at a big box store. Because of this collective unwillingness to challenge the price we lose that right as individuals. If I won’t pay the demanded price for that IPhone, the store will sell it to someone else. Our sheepish acceptance of supply controlled pricing puts us at a disadvantage.

    The relative value of a commodity s determined by its availability. Value is an inverse function of availability. The less available a commodity is, the higher its value. If you think of money as a commodity, you may be inclined to believe that the scarcity of it would make it more valuable. You would basically be right.

    Inflation happens when the value of money decrease relative the price of goods and services bought and sold with it. Even if backed by gold, inflation occurs. It simply means you have to offer a bigger piece of gold to buy that big Mac than last week.

    The problem is debt, but only a certain type of debt. The problem is in fraudulently overvalued CDOs which have the same effect as flooding the economy with counterfeit currency.

    Its not so much currency printed by the government that is the problem as it is the negotiable financial instruments being traded like large denominations of money.

Leave a Reply