Wow. One year. And, even more impressive, you’re still there. This time last year I was sitting on my (former) sailboat languishing in Newport, Rhode Island and contemplating what direction my life was to take. You stayed with me through my trip to the lonely little dock in North Carolina whence I set off for a few months of sofa surfing. You followed me westward in my quest for and eventual move to my new home in the sleepy backwater of Seattle. You chuckled along with me as I stumbled through Tango lessons. You were still paying attention when I wrote of my plans to become King of America in order to straighten out our crisis of governance. A plan currently in limbo due to my ill-conceived focus on energy and a mistake I hope to remedy someday. And now, just like that, a whole year has passed. The blog is One today and it’s time to celebrate. So put on your party hats, get out the noisemakers, fire up the candle, and get ready for some cake and icing. This is a Happy Time. Today I’ll mark the occasion with a return to one of the things I hold dear to my heart, a subject at once timely and ironic. Let’s talk about something that will extinguish our flickering festive feeling faster than a sundown thunderstorm on the Fourth of July.
Today’s topic is: Economics.
The recent “credit crisis” emanating from Washington, DC has rekindled my urge to talk about my most favorite of themes: the stupidity of other people. But to really get to the heart of the matter and examine the black hole of inanity that is growing daily we first have to step back in time and look at the current looming economic disaster from the safe, distant viewpoint of our troglodytic ancestors. Because today’s economic problems all stem from a decision made many millennia ago. Let’s revisit that Pleistocene scene.
Gork and Nanu were sitting by the river. Nanu had been very successful fishing that day and he was the proud owner of two glistening fish. Gork had a bag of nuts and a pile of mastodon jerky from a hunting trip a couple of weeks ago. Gork was envious of Nanu’s fish and said something like “Hey, Nanu. Wanna trade one of your fish for a bag of nuts?” Nanu considered Gork’s offer but decided that nuts were pretty plentiful right now and he’d rather have the jerky treats instead. So he made a counter offer of one fish for the pile of jerky. Both traders knew, refrigeration being what it was in those days, that the fish would be worthless tomorrow so they haggled the deal to half of the jerky for a fresh fish. Both were happy and Gork went off to grill up some nut-encrusted sturgeon and Nanu went off to store his jerky in case he didn’t catch any fish tomorrow.
Sometime later it was a similar situation with the difference that Gork’s jerky was still drying and wouldn’t be available for another couple of days. This time Gork said “Look, Nanu, I’d really like one of your fish and if I had a half-pile of jerky I’d happily give it to you. But I won’t have any for a couple of days so instead,” at which point he reached into his pocket and pulled out two shiny stones, “hang onto these and when you want to get the jerky you can just give them back to me.” Nanu would have been skeptical at first but, knowing his fish would be rotting by the morning, figured he had nothing to lose. The worst case scenario was that he’d now be the proud owner of two shiny stones. Three days later Nanu is not doing well at the river so he goes over to Gork’s house, pulls out the stones, and Gork exchanges a half-pile of jerky for the sparkly rocks. He kept his promise. Now, step forward a bit, add one complication and the story is complete. Nanu has caught a fish but he’d really like some nuts with which to encrust it. Babu has some nuts so Nanu tells Babu that he has a couple of shiny rocks, each of which is worth one-quarter pile of jerky from Gork. Babu decides to take Nanu on faith as he’s her brother and gives him her nuts, runs over to Gork, and exchanges one stone for a small bit of jerky.
Thus is “money” born. Eventually shiny stones, which are about as rare as, well, shiny stones get replaced by a certain specific shiny stone – namely, gold – which everybody agrees is oh-so-pretty-and-heavy and therefore much more valuable than just ordinary shiny stones. Values of things like nuts and fish and jerky are set relative to an amount of gold and from this simple equation sprang (springs? sprung?) the “economy”.
Eventually, new features like dollar bills, banks and American Express are added to the definition of money, all of which were just for convenience so you wouldn’t have to carry bags of gold around with you. Finally, a completely new feature was added to the definition of money, the one which is actually the root of all our current problems, to wit: “credit”. At its simplest credit is merely the promise to borrow something or some money, and then pay it back – plus a bit more. The “bit more” was kind of interesting and the name stuck.
Buried in those previous paragraphs is the real definition of money. It’s not nuts, fish, or jerky. It’s not shiny pebbles, gold, dollars, credit or American Express. The real value of money is the promise by one person to another to honor that value. Nothing more.
For centuries the economy flourished using precious metals – predominantly gold and silver – as its base for valuation. Bits of these shiny metals represented the promises made. But the economy of the world eventually grew faster than the supply of the metals. Beginning in the 1930s the United States started weaning itself off of a precious metals backed currency. First to go were gold coins. After 1934, when you took your dollar bills into the bank you could only exchange them for silver. Then, silver was removed as the backing behind the dollar in 1964. Since that time the U.S. dollar has remained supported solely by the full faith and credit of the United States Government. This means that the only reason a dollar is worth a dollar is because the government says it is.
It promises.
In 1934 the price of gold was fixed – by the U.S. – at $35/ounce. This price remained in effect until 1971 when then-President Nixon stopped selling gold. Afterwards the price adjusted fairly rapidly to reflect what the rest of the world thought of the U.S. Dollar; which was much less than we did. The price climbed to around $400/ounce by 1979 and remained in that ballpark until 2006. By then the world figured out that the U.S. had broken its promise. It was producing so many dollars by issuing credit the value of each of those dollars was worth less and less each day.
If you consider that gold has, since time immemorial, been a fairly stable indicator of what something was worth, then the price of anything as measured in gold is a pretty fair indicator of something’s value. Looked at that way, one ounce of gold in 1971 would buy thirty-five dollars. Today, that same ounce of gold would buy over one thousand seven hundred dollars. This means your dollar is now worth just 1/48th (sorry about using fractions, but I am so not going to say “48 times less”) of what it was in 1971.
But most things don’t cost forty-eight times more now. Oil for example, costs only twenty seven times as much. Wheat a mere eight times more. This is because those commodities are elastic, supply is able to follow demand so the prices don’t jump in a linear fashion. But gold has always been different. It is hard to find and almost impossible to rapidly increase supply as demand builds which makes it a better indicator of value than, say, oil or wheat.
Which brings us up to the Current Worldwide Financial Meltdown (Part II). In 2008 the global financial crisis, which in a few years will seem so quaint, was precipitated because banks believed that value could be built by buying debt, namely sub-prime mortgages. Part II, currently scheduled for release next year, will occur because countries believed that prosperity could be built by creating debt. Based on early reviews from places like Greece, Ireland, Portugal, and Spain; 2012 is going to make 2008 look like a picnic. All of these countries sold securities to finance their social programs, military, or other government operations just like, whoa, the United States. At the same time, like the U.S., they didn’t increase revenues to use for paying back the borrowings; they just borrowed more. Now they can neither raise taxes to pay for things that need paying for, nor cut programs without inciting riots, nor borrow another dime to continue the shell game. They are stuck with no clear way out. This is what we, in the U.S., have to look forward to over the next couple of years. With our so-called “leaders” in Washington unable to make any decision, none will be made. With no clear direction in place the “full faith and credit” of the U.S. will come to mean exactly nothing.
I am loath to put forth any prognostications but I’m going to make a rather vague hand-waving prediction here. Since the U.S. Constitution was ratified in 1788 the U.S. has had one, count ‘em, one form of government. I looked high and low but was unable to find a single other nation which has had not had at least one major change of government in that same time period. (We could argue about the U.K.) Now, some might argue that that just shows how strong and stable our form of government is. I would suggest that it is more a reflection of our historically vast wealth and former prosperity than anything our government has actually done to promote itself. Now, with almost all of our sources of wealth depleted or shipped overseas, governmental effectiveness hovering at the nadir – “Light Bulb Freedom of Choice Act” give me a break – and the unwillingness of the majority of voters to demand change, the next couple of years promises to be an interesting time. It might even be our turn to find a new way to govern ourselves. Regardless of whether the current credit crunch is the last straw or just a noticeable pot-hole on the road to the future, better buckle up. It’s going to be a wild ride.