Just a bit of news, Bonnie Biafore and I are going to be interviewed tomorrow, November 3, 2012 at writersparty.com as part of our full-on media blitz in support of Fresh Squeezed. We’re doing a book giveaway as part of the interview, so check it out. We’re also running a contest on Fresh Squeezed’s Facebook page. It’s your chance to win a brand new eReader and copies of the book. Come on over and enter.

On with the blog.

What with the election and all, the Economy has been getting a lot of play in the news of late. It’s all deficit this and taxes that and by now I’m sure you all have those old trickle-down, manufacturing sector, job exporter, service economy blues again Mama. And I’m sure you have had enough.

Which is why I’m here.

To make sure you get more. I mean, I’m still in a bit of a funk since you decided to not elect me your king so I could fix all these problems. You chose not to, and because payback is a bitch, I’m going to cut through all the political rhetoric and hopeless romanticism and let you know how bad it really is.

Again.

I am not alone in this assessment and, despite the fact that most of the others live in off-grid cabins in the forests of Idaho, there are some learned economists in my camp. The genesis of this blog came about when I read last week about when Ben Bernanke, learned economist and chairman of the U.S. Federal Reserve Bank, was asked about money. The inquisitor was Rep. Ron Paul, who doesn’t think much of the Fed anyway, and the date was July 13, 2011. It went something like this:

Rep. Paul: “Is gold money?”

Fed Chairman Bernanke: “Nope.”

Flash forward to NPR’s article of last week titled “It’s 10 P.M. In Frankfurt. Do You Know Where Your Gold Is?” The brief story summarized the gold reserves of the top ten piles of gilt and how the German central bank, at number two, had been ordered by the German federal court to go count it. The problem with this is that a big chunk of German gold sits collecting dust in a vault at the New York Federal Reserve branch and not, in fact, in Germany. The upshot of this is that, over the next few years, 150 tons of gold is to be shipped back to Germany for counting. Gold which has not been seen by human eyes in half a century and, as far as anyone can tell, exists only because the Fed says it does.

And the Fed says it’s not money anyway.

The only reason that there’s any money is that somebody says there is. There’s not really a thing called “money” in and of itself. In fact, the vast majority of what economists call “money” isn’t even real.

Money, at its base is an agreement of a standard value which can be used as an intermediary in an exchange of goods and services. Historically, everything from sea shells to the stone wheels of Yap has been used as currency, that is, the physical representation of money, but in Europe, Asia, and North Africa, we settled on metals as being representative of value. And in particular three: gold, silver and copper.

Over time as civilized people grew lazy and didn’t want to carry bags of coins with them, banks began taking coins in trade for paper bills, an idea which culminated with nations issuing paper currency. You could take this currency into a bank and change it back into gold and silver, if you wanted, but there was an economic problem: When your money supply is based on a metal, your reserve of that metal limits your money supply, and thereby your economy. This was the impetus for capitalist societies to shed the standard of precious metals and base the value of their money on the strength of their economies.

Currently, there is not a single metal-backed currency left on the planet.

So what’s the problem? Simple, just play a game of follow the money. 

The U.S. gold reserve, a trifling 8,133 tons, is currently worth a mere $418 billion: an amount insufficient to pay the federal government’s expenditures for even two months let alone be used as a base for the entire economy. So back in the 1930s, the U.S. adopted a fiat based monetary system in which little Italian cars were the basis of finance. Actually, the U.S. issued a fiat, a decree, that the little rectangles of green paper were worth what they said they were. Unfettered by its shackles of gold, The Almighty Dollar came to power in a world which had been bombed to smithereens during World War Two. The U.S. was the world’s banker and manufacturer and was the one place which everyone agreed was safe. With the go-go U.S. economy of the 1950s and ‘60s the supply of money was free to grow as fast as the economy. It became a beast that fed itself.

So we now have a basic money supply – cash plus checking – of about fifty times the value of the U.S.’s gold reserves. Gold is not money.

But there is more to money, from an economic standpoint, than cash and checks (known as M1 to economists). There’s M2 which is M1 plus very liquid assets like CDs and savings accounts, and there’s M3 which is the sum total of M2 and liquid non-banking assets like money market accounts. Stop yawning. It all adds up to nearly $15 trillion. Thirty-six times the value of the gold reserves.

Now, as I like to say, this is when you should get worried. If you look at the money supply, as I do for fun, you’ll notice that the U.S. M3 value has increased from about $13.5 trillion to $14.5 trillion during the period of the Great Recession – 2008 to present. In that same time M1 – cash in hand – increased from $1.4 trillion to $2.4 trillion.

This is where the Jeopardy theme song plays for a few seconds.

Yup, those differences are the same. Which means the only reason the economy is “growing” is that somebody’s printing money to make it grow. In fact, M1 has grown more in the past four years than it did in the previous thirty.

So how does this factor into my worries of doom and gloom vis-à-vis the upcoming election? It’s perhaps easiest to see when we strip away some of the zeros.

Imagine that the United States is, instead, a poor family of four with an annual income of $21,700. It’s hard for four people to live on twenty-one grand, so to pay for the two cars, the kids’ braces, food, maybe a trip to see the grandparents, and little things like clothes, health care, and education, they actually spend almost $39,000. The family is forced to borrow $16,500 a year to make ends meet. Over time they have foolishly racked up a total debt of $163,000. So, to help improve their situation, they have instituted budget cuts in the amount of $385 a year.

Sounds pretty stupid doesn’t it?

Now, add eight zeros to each of those numbers and you have the current U.S. federal financial predicament. 

Keeping this financial farce in focus; what can we learn from what the two candidates have told us about their respective economic plans? What can we expect if they are elected and get to implement their plans?

First the President. Mr. Obama, according to his website, has only two economic items that say what he plans on doing as opposed to what he’s already done. First, he promises to eliminate tax breaks for companies that send jobs overseas. These tax breaks would be offset by tax incentives for companies keeping Americans working. Second, he plans on making the wealthy pay the same tax rate they did in the euphoric years of Bill Clinton. He talks about taking in $5 trillion. But that’s over ten years and includes the cuts for the middle class which are so not going to expire. But letting the tax cuts expire only on the rich would bring in a mere $180 billion a year to offset that $1.65 trillionper year deficit. The economic term for that is “small change.”

Mr. Romney’s plan is even more amorphous. He promises to vet every expenditure against his arbitrary “is it worth borrowing this money from China” benchmark. Bye-bye Big Bird. In fact, bye-bye almost every social program enacted in the past 100 years. He says (in his campaign, though not on his website) that his tax cuts will be revenue neutral since they will be offset by closing unspecified loopholes and deductions. This really means that the effective tax rate remains the same; but, because his unspecified loopholes and deductions make up a higher percentage of the income of poor and middle class people, the tax burden will fall most heavily on them. Trickle-down will continue to be trickle-out, to Bermuda and the Cayman Islands.

Compare those last two paragraphs and you can come away with but one conclusion:

We are so fucked.

Now, despite the fact that you didn’t elect me king (even though it’s not too late to do so); I’ll let you in on a little secret. Economies are dynamic, living, and chaotic systems. They’re supposed to go up and down. This is a natural part of their existence. We get into trouble by thinking we can control them or force them off their natural cycles. It hasn’t worked yet but such is humanity’s hubris.

Soon the election will be over and we’ll know which side of the mountain we’ll all be sliding down. Regardless of who wins, gold will still not be money, the economy will still remain out of control, and the Fed will still be minting dollars out of thin air. This is going to get interesting.

Now go vote.