Friday, August 3, 2012
America 2050: What Will We Build? Part 4.
I am an historian, not a psychic. America in 2050 is just a nice round date. I believe that our destiny lies reliably in the past. If you want to know where we're going, we have to look at where we (and Western Europe) have been.
There are many articles on 'Fiat Money' and its history. I urge you to read them. I'm seeking brevity, not comprehensiveness.
Future Economy - The Death Of The Fiat Dollar
The Founding Father's of America disagreed on many things. The extent of federal vs. state power, slavery, taxation, the form or our republic, how to give the smaller states some voice without being unfair to large ones. However, there is one thing they all agreed upon. Silver and gold constituted money - and paper fiat currency did not.
Briefly, gold and silver have been valued as money by humans for over 5000 years of recorded history. Whenever governments have tried to get around precious and scarce gold and silver as money, disasters inevitably followed.
The Roman denarius, a coin the size of a modern nickel and made of pure silver, was accepted throughout the known world two millenia ago. As the Empire shrank geographically and the size and expense of government grew, the coin was secretly diluted by substituting base metals for silver. Toward the end of the Rome, the denarius had only a thin silver wash and was universally shunned in commerce.
Why did Rome destroy the denarius? Because they wanted money to spend without increasing taxation on the already overtaxed Roman citizens. So, they tried to produce more money without the inconvenience or political repercussions of increased taxation - or the bother of mining and refining more silver. They didn't have any other choice. Paper money wasn't to be invented for over five hundred years, rendering impossible the kind of instant digital and paper money creation we take for granted today.
No, the money magic act we see today had to wait until the Chinese invented paper money in about 806 A.D. Then, the Mongol Empire in the 13th Century used their power and influence to spread it around Asia and Eastern Europe like an STD. The citizens called it 'flying money', as the slightest breeze made it fly away. At first the paper money was backed by gold and silver and the economy expanded. Eventually, however, the government decided it needed more money without the bother of taxation, and the massive printing of notes began. Within two hundred years paper money had become worthless.
Flash forward to 2012. It's been nearly a century since the first modern paper fiat currency was printed in 1913. 'Fiat money' isn't some under-powered Italian car blocking the passing lane. It means that it's money and worth something solely because the US government says it worth something. It's no longer backed by gold or any other real asset. In the last one hundred years the paper dollar has lost 97% of its purchasing power! It's lost 72% just since 1972, when Nixon severed our last connection to the gold standard. The term inflation has been an unalterable part of our lexicon, and it seems axiomatic today that things are likely to cost more tommorrow than they did today.
In America 2050 our money will be very different. In 2012 we are nearing the endgame collapse of the fiat money lie. Our National Debt exceeds $100 Trillion dollars if you include all the money we owe as well as all the money promised in our ever growing "Nanny State" social net.
Prices will fall in deflation, as we have seen. History in Weimar Germany and Austria (as well as many others) tells us that inflation and hyperinflation will then follow closely behind. Paper fortunes will be wiped out overnight. The US money supply will continue to grow because like an addict's addiction, one fix followed by another and another, growing steadily larger to avoid painful withdrawal symptoms.
As prices rise and the middle class melts away like an ice cream cone in the hot sun, riots and unrest will occur. The US Government will be called upon to "do something". History tells us they will have the following options available to them:
1. Implement Price and Wage Controls - Nixon tried this in the early 70's to combat stagflation. It was voluntary and an abject failure. History tells us when price controls are not enforced, they're ignored. When they are enforced with heavy fines or even jail and death sentences, they likewise fail because factories would rather close than sell their products for below market prices. Goods simply disappear from the shelves. Yes, the price is low and government controlled, but the products are nowhere to be found. In Austria in 1922-1923, a thriving black market cropped up selling anything you could want from sausages to work tools, at a marketedly higher price than the state-mandated one.
The "good" part about this idiotic non-market based strategy is that the government can claim they are actually doing something. It's just the speculators and the big companies who are evil - deflecting blame from them onto the companies struggling with rising raw material costs.
2. The other strategy is more effective, but much less popular. To stop runaway inflation by tightening the money supply and raising interest rates. Increased taxes on businesses and citizens, while slashing government entitlement programs follow. Paul Volcker in the 1980's used some of these methods effectively to recover from the excesses of the Carter years. However, he had a mouse-sized problem, and in 2012 America has a Godzilla-sized monster to handle!
This latter strategy will NOT be employed by any US government, at least not without a major revolution or crash - changing the very structure of our political structure and the "democratic process". At this terminal stage they have no choice but to continue with the former choice, and keep the money machine pumping.
In the America of 2050 many rich will have lost everything they had in paper stocks and dollar denominated assets. The Middle Class will be reduced to a butcher, baker, candlestick maker type form. A large poverty-level workforce and an unemployed underclass will be present, always on the edge of desperation and a never-ending source of political and social rebellion.
We will have a money supply grounded in gold, silver, and other sources of real wealth. The economy will be forced to contract as it has been artificially bloated with easy money and credit over many decades. Prices will become stable, but the standard of living could easily revert back to an 1850 level of sustainability.