Funny money

On this blog in the past I have complained about the devaluation of American currency.

Right now, they’re blaming it on the housing boom, but it seems to me the housing boom was a symptom. The cause was the Clinton era “fast money” that Robert Rubin and Bill Clinton made into policy. This drove the economy into full speculative mode and fanned the flames of the dot-com boom. Because money was easy to borrow, and because this then encouraged short-term trades, the amount of activity — often confused with the value of the money itself — shot upward. The result was the perception that our money was worth more than it was.

I’ve observed in the past how prices in the USA have generally gone up and sizes of products gone down so much that we have lost over a third of the practical value of our money. This kind of figure cannot be measured by official means because it requires observing everyday details in sum total, not attempting an “objective” (and hence unrelated, deconstructed, abstract and irrelevant) statistical measurement. If you look at what the average middle class family in America is paying out every month, they’ve lost 40% of their purchasing power.

The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with ­middle-class families bearing the brunt of the decline.

The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992. – “Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says,” The Washington Post

This recession came about starting in 2001. George Bush staved it off for a while with his tax cuts and wars, which dumped money into the economy where it would be spent. That’s the kind of fast money the right likes: not speculative, but immediate and spent on infrastructure and development. When Obama took office, he faced a monumental challenge but had a vast wave of popularity behind him. That didn’t pan out, and so the recession returned. The factor we should pay attention to is that this is a 1990s recession. All those government programs under the Clinton years, including his brilliant plan to force banks to lend to at-risk groups, and all those nifty dot-com business opportunities that were trading at a brisk pace? Like MySpace and AOL, they soon revealed their actual worth: not bloody much. They were paper tigers.

That paper tiger syndrome was the underlying cause of the recession. During the years of fast money and speculation, we devalued our currency. Five years later, the market re-adjusted to reflect actual value. During those years, all the purchases and loans we’d acquired as a means of driving that economy now lost value, making a lot of them completely underwater. People ditched them, and like a run on a bank, the panic spread. Soon the idea of the currency’s value itself was in doubt. All because our leaders refused to reign in the easy money, the overhype of the dot-coms, and the mania for owning second, third and fourth homes in an attempt to capture some of that magic “created” wealth.

Greenspan could have used his enormous stature to warn of the dangers of buying overvalued houses. He could have warned lenders of the risks of issuing mortgages on overvalued property. And he could have used the massive research capacities of the Fed to document without question the existence of a bubble and the damage that its collapse would cause.

He also could have used the Fed’s regulatory power to crack down on the epidemic of mortgage fraud that the FBI had highlighted as early as 2004.

If Greenspan had acted responsibly and taken some of these steps, as some of us have urged at the time, the housing bubble could have been contained before it was too late. But if all else failed, he could have raised interest rates. – “Why middle class has taken a big hit,” CNN

Clinton, Greenspan and Rubin had no intention of reining in what they had created. It was too popular. People loved the idea that the economy like a great Ponzi scheme just went up and up, and everyone got rich just for being part. Democrats love popular things like importing cheap labor to make the unwealthy feel wealthy for all the services they can now afford, flattering business with cheap labor and costs offloaded to the population and the government, and huge regulatory systems that hire many people and create the illusion of a booming economy. But eventually, the piper must be paid.

At this point, our greatest fear is that a number of things will fail roughly simultaneously. Google and Facebook could also turn out to be paper tigers worth a lot less than what we think because they do not actually generate any wealth. Our lack of wars and unwillingness to engage in tough foreign policy can decrease our prestige. And the true extent of make-work “job welfare” both in our government, and in a private sector bloated by false incentives like affirmative action and green initiatives, could reveal our economy to itself be a paper tiger. We make nothing. We design things, sell services and re-package existing technologies as new products. Other than selling to our own consumers, this is worthless. As the “developing” world stops selling us its labor cheaply, because is people have gotten accustomed to middle class lifestyles and thus are too spoiled to desire poverty and sweatshop conditions, our house of cards may collapse.

It’s not just about Spain’s debts and Europe’s currency, or even just about Europe. It’s not just about Washington’s deficits and the US recession, or even just about the US.

These are the symptoms and the locations of a common dysfunction, not driven by some remote economic force but by people and politics. That dysfunction is very human, very normal and very simple. The central driver in the decline of the West is indulgence. – “Spoilt West invites its own decline,” The Age

The West is spoiled because our two pillars are consumerism and socialism. Our socialiasm arose from European-style socialist governments in the postwar period, which maintained order by pampering their citizens with social programs. These programs keep everyone in line by keeping them dependent, and American leftists adopted them in the 1960s. Our consumerism comes from the American-style capitalism that won the Cold War by among other things selling us consumer technology and thus funding the R&D for the next generation. Between the two, we have a society that finally fulfills the liberal ideals of the French Revolution in 1789, which is that people are “equal” because no matter what choices they make, they will be given a place at the table and a share of the wealth. Consumerism makes them capricious, and socialism insulates them against the consequences of their actions. True equality is achieved.

As sad as it seems, the result is that we have not learned from the past. We are generating false value through our economies because those economies are based on the economic decisions of the individual, as subsidized by the whole, and as such have transferred focus from “production” to “services,” or selling stuff to ourselves and hoping the rest of the world buys into our assumption that we’re so good and important that our currency is magically made valuable as a result. This assumption is only true when our economy is valuable for other reasons, like production. In the meantime, we’re setting ourselves up for an even bigger recession by failing to heed the warnings of our economic and political reality: equality doesn’t work, even when we gamble all our wealth on it being so.

7 Comments

  1. Joel says:

    I am very sympathetic to your cultural views and read this blog regularly, but I think too many rightists (especially libertarians) are accepting overly simplistic critiques of the Federal Reserve and central banking in general.

    In order to understand macroeconomics, one must really understand Milton Friedman. He was a “consequentialist libertarian”, thought his views were American traditionalist, but was not as traditionalist as this blog would prefer. Nonetheless, his economic studies are important. They are the dominant view held today, the one under which the Fed operates.

    Although critical of the Fed, he understood its critical role in price stabilization. He blamed its failure to save banks and avoid deflation for the Great Depression, a charge which Ben Bernanke agreed to and officially apologized for. For a source on this, read the last paragraph of the following speech: http://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm

    There is a rather excellent clip of Friedman explaining the history and purpose of the Federal Reserve here: http://www.youtube.com/watch?v=9V5OP-VmXgE

    What most people just don’t understand is that banks making loans creates money. The more loans they make, the more money there is in existence. The less loans they make, and the more banks go bust, the less there is.

    Nobody wants inflation. But nobody wants deflation either, and that means that stabilizing the currency requires creating money when banks aren’t loaning.

    I also don’t think it is consistent from a monarchist or authoritarian perspective that a government shouldn’t be able to define its own money amongst its people.

    1. I’m not sure this article is in any way about the means of control of money. It’s about the specific decisions made to hyper-inflate the currency using bad investments as the value basis. Whether that’s done through the Federal Reserve, or simply bad regulatory law and public statements by our leaders, is probably irrelevant.

      1. Tim Gabz says:

        I need to dispel the incorrect myth that banks create money. They are a tool to create money supply. Money is created through the national policies and a whole monetary policy that affect the national currency.

        It is a whole process involving the Fed through to the home loans.

        The use of subprime mortgages, even their existence, as collateral, was what I call unreal money supply. Loans assume repayment to sustain the support of their value. Simply put there were heaps of false value out there. Cycling through the economy and what was seen was high velocity money more than more considered dealings. The value was assumed higher as the money was cycling faster than normal and the numbers looked good.

        The supply wasn’t real and assumed alot higher than in reality.

    2. Esotericist says:

      “What most people just don’t understand is that banks making loans creates money.”

      Money is the expectation of money. Each time we create a loan or paper instrument, money is “created” based on the expectation that it will be fulfilled by the value of that instrument. Much like the stock market, this makes the instruments themselves commodities, and the fluctuations in their values are determined by the market and determine the market.

      It’s dangerous circularity but it works, if in the hands of the intelligent who can see the future consequences of their actions. Regulation won’t do that, and in fact drives such people away with too many pointless rules.

  2. Jim says:

    Equality under the guide of liberalism will always leave the payer beneath the payee. There is nothing fair or equal about America as long as those ideals exist. Nor will society have any goals besides selfishness and narcissism.

  3. Joe Coffee says:

    Congratulations on permeating AltRight though it’s not much fun seeing articles two times! :)

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