Confidence Is Leaving the Fiat Money System
Whenever financial markets set out to end the disastrous process through, a decline in economic activity, governments and their central banks will do whatever it takes to keep the fiat-money system going: lowering interest rates by increasing credit expansion and increasing the money supply. In the current situation, however, banks' capacity to keep expanding the credit and money supply has been greatly diminished. FULL ARTICLE
Comments (39)
Why is it that when I speak to people they think that I am crazy for wanting a gold standard? I'm no genius, and I am new to this Austrian school, but I have always believed in free markets. Why is the cause and solution of this economic crisis clear as day to me, yet everyone in washington put together can't find their nose on their face? Are they just messing with us? Are they doing this on purpose to increase their control?
Published: October 10, 2008 9:30 AM
Actually, I do think that they are doing this on purpose. It is after all a major source of goverment influence and income.
Published: October 10, 2008 9:32 AM
While I would like the fiat system to collapse, for it is based on false fundamentals and is run by thieves, I do not believe that what is happening in the market shows that people are loosing trust in US$. They eventually should and probably will, but at the current moment, the rise in the value of US$ compared to almost everything shows that the society trusts US$ more than anything else.
Published: October 10, 2008 9:39 AM
agree with Jayant... the current crisis has perversely increased the value of the USD (relative to other fiat currencies) due to the "flight to quality" that has taken place. This has driven yields on US treasuries to extremely low levels, with the 3m bill trading at literally a zero yield and the 30yr under 4%. The true collapse will not occur until investors begin question the creditworthiness of the US government and the quality of the assets on the Fed's balance sheet. Just like the banking system, the US dollar is a confidence game that could unwind in a matter of weeks.
Published: October 10, 2008 10:21 AM
None of you gold advocates ever admit the unit price to convert back to a gold system - $40,000/oz? If the US was to change the gold in private hands would be confiscated.
If the system was changed approx how many dollars per capita would be in circulation? Enough to pay every worker once a month?
"The market will decide" doesn't cut it because until the freak post WW2 conditions the market decided that half of all Americans would be working poor who lived hand to mouth.
That the dollar is becoming stronger with respect to the euro and pound is evidence of corruption, not a basic defect in the system. The mess is a product of deregulation, not the electronic money system.
I oppose the death penalty except in the case of CPAs who cook the books. Even the MAFIA needs honest books.
Published: October 10, 2008 10:50 AM
billwald, if you do not believe in free market economics, why do you even visit this site? Isn't all this non-sense just a waste of time?
Published: October 10, 2008 11:17 AM
It should be apparent to all but the dead that artificial increases in the money supply, consequent lower interest rates and resultant inflationary governmental policies all coalesce to sooner or later kill off even the greatest economies. I heartily welcome the death of our current misguided economic policies and pray that death be both quick and as painless as possible, given our current circumstances. Liberty has all too often been purchased at the expense of good lives, only to be squandered and sold for worthless paper by those with no true sense of history. May God help us to safely weather the storm created by such collective, misguided and overwhelming ignorance.
Published: October 10, 2008 11:55 AM
"The market will decide" doesn't cut it because until the freak post WW2 conditions the market decided that half of all Americans would be working poor who lived hand to mouth.
WW2 is an interesting breakpoint. Why WW2? What do you think caused the increasing standards of living since the beginning of the Industrial Revolution? What do you think caused the "freak conditions" post-WW2?
Published: October 10, 2008 11:56 AM
Isn't it simpler to make the politicians toe the line when it comes to spending? What difference does it make what we use as currency if they are bound and determined to spend more than they get? And they will find a way to corrupt the gold.
Published: October 10, 2008 11:58 AM
I don't think the plunging U.S. stock market is a good indication of whether confidence is leaving the fiat money system. Rather, I think it's a direct response to the actions of the U.S. government.
The U.S. public was overwhelmingly opposed to the bailout, despite Bush's televised address assuring us that everything would be fine after we enacted it. Our politicians ignored the will of the people, and enacted it anyway.
The American people did not believe that a bailout was the answer, and they are voting against it using the only mechanism government has left them with: their wallets.
At some point, people will decide that they've had enough, the selling will bottom out, and people will start buying again. The fiat money system will stumble on a least a little while longer.
However, I think something very remarkable has actually happened. For decades, U.S. markets have revered the Federal Reserve; markets would practically rise and fall based on how Greenspan would arch his eyebrows. But no longer. The markets' reverence for the Federal Reserve appears to have evaporated. The market's view of the Federal Reserve appears to be shifting to the Austrian view: a bungling, bureaucratic organization that harms the economy in its attempt to "manage" it.
This is actually a joyous thing, because it implies that we might be able to eke out a way to return to sound money that doesn't involve hyperinflation and total economic collapse...
Published: October 10, 2008 12:24 PM
@John:
The government can corrupt paper money because they can create it out of thin air. In contrast, commodity money (gold, silver, platinum, et. al.) cannot be created out of thin air. Therein lies the strength of commodity currency.
You should really read Rothbard's Taking Money Back essay; I think it'll answer many of your questions.
Published: October 10, 2008 12:36 PM
James; where do you see this evidence of the market embracing Austrian principles? I hope you are right.
Published: October 10, 2008 1:03 PM
I don't think we have to dismantle the fiat money system. We merely need competition that is legal. This is Ron Paul's idea. Maybe if things get bad enough, he might be able to get some support.
This freedom to choose on money is similar to the idea of freedom to opt out of the Federal Drug system. If the FDA and the FED were stripped of monopoly power, I think we'd see a rather quick and healthy return to honest money and drugs that work.
But we have to go deeper than the 30's before anything like freedom will become popular again.
But then again, I don't know anyone who doesn't care about losing their money. So, maybe there is a chance we can survive this without a WWIII.
Published: October 10, 2008 1:14 PM
@adam:
On Tuesday (2008-10-07), Bernanke gave a speech in which he signalled a readiness to lower interest rates.
In the past, whenever the Federal Reserve has signalled a readiness to lower interest rates, markets jump.
But on Tuesday, markets fell after Bernanke's speech.
It's difficult to interpret that response as anything other than a vote of no-confidence in the Fed.
In light of decades of reverence for the Federal Reserve, that is simply stunning.
Eliminating the Federal Reserve is a political impossibility as long as the public—and most importantly, the markets—treats the Federal Reserve as a sacred cow. Those days of blind reverence appear to be drawing to a close.
Published: October 10, 2008 1:23 PM
Eric, are you a subscriber to the notion that WWII got us out of the depression? I personally don't believe that and I kind of think its naive to think that just because WWII happened then we recovered from the depression, that means the war saved us. If WWII got us out of the depression, why wouldn't starting another world war get us out of this, or for that matter, why isn't the Iraq war helping our economy. I think this answer is staring at us in the face, war is not good for the economy, war is only destruction and death.
Published: October 10, 2008 1:31 PM
Stop advocating the gold standard. Advocate the elimination of legal tender laws.
Published: October 10, 2008 2:31 PM
As long as people will keep asking "what else could be money if not the green paper", there is the need to advocate comodity money, with emphasis on that it prevents money supply from being expanded at government whim. Gold in particular is the second best choice, and silver was the market winner long ago, in a galaxy far far away.
Elimination of legal tender is a practical step of how to implement comodity money, but we can hardly get it without wide enough understanding of why we should make that step.
Published: October 10, 2008 2:55 PM
1) The dollar is not fiat money. The dollar is not physically convertible into gold, but that is not the same thing as being unbacked (i.e., fiat). There is a reason why every central bank that has ever existed has kept assets as backing for the money it issued, and that reason is that backing determines the value of the bank's money, just as GM's assets determine the value of GM stock.
2) Libertarians should not be advocating a gold standard, or any other standard. They should advocate free banking, including fractional reserve banking, if banks and their customers choose it.
3) Legal tender laws, as currently used, have no effect. Declaring that sellers of bread must accept dollars means nothing if the law doesn't specify how many dollars should be accepted for 1 loaf of bread. Not that legal tender laws do any good, and not that they don't have the potential for harm. It's just that as practiced today, they are irrelevant.
Published: October 10, 2008 4:01 PM
Andy: I agree that WWII didn't get us out of the depression. I'm not certain what exactly did that, although I lean towards what Harry Browne once told me, which was that the dismantling of war time controls also tended to sweep clean many FDR programs and so led to the depression's end in 1946.
What I really meant was let's hope that the American people will want to save their finances enough to actually make the right choices this time around. But I don't really think that will happen, and I see a war with Iran (a world war III) coming.
War tends to be good for the government, especially when they've been doing so much harm, as they did in the 1930s. I think there is no doubt that FDR did a really good job of stiring up trouble and eventually getting the Japanese to attack. And once that happened, Americans went joyfully to the recruiting stations; just as their grandfathers did in WWI. And during wartime, the government is never blamed for the lousy living standards. It's the one time that Americans reward those who put them in harms way.
I see no reason to suspect this time will be any different. After all, we never learn from history. Why else would we repeat it so often?
Published: October 10, 2008 4:11 PM
Mike, it's exactly the legal tender laws which keep the FED in business. That is their "gun". What else is there? Clearly it's not because the market chose the FED notes above all other forms of money. After all, before the FED, there were lots of banks printing notes.
If you don't think legal tender laws have an effect, try to pay your taxes (or any debt) with something besides Fed dollars. If you and I have a contract, and it says delivery in gold, where are you going to enforce that contract, if I decide to pay you in fed notes instead of gold? Even were you to sue me and win, the judgment would be in dollars.
No Mike, it's legal tender that is the spit which is holding the fed together. After all, they are government - they are allowed to use force on innocent people. And that is, after all, the definition of government.
Published: October 10, 2008 4:30 PM
Eric, I'm only a new attorney, but I am pretty sure that you can contract for anything you want. Although you are most likely correct in saying that any judgment will be in fed dollars, unless you sue for specific performance, which won't work because you can go buy gold with dollars, the specific gold likely wont have unique qualities warranting specific performance. But you can get the value of the gold in dollars, which would protect you against inflation.
Published: October 10, 2008 4:58 PM
Mike, The poverty of your assertions is only exceeded by the arrogance of your attempt to tell Libertarians what they ought to advocate. Your comparison between government backed currencies and GM stock is apt, except that it disproves your point rather than making it. Since GM assets are a challenge to quantify, always in flux and subject to sleight of hand accounting, resulting in inflated asset value claims, how in the world are we to draw a reliable connection between those assets and the true value of GM stock?
Your second point loses me all together and I could not disagree more. First you quite presumptuously tell Libertarians they ought not be advocating a gold standard or any other standard, while immediately following with what they ought to be advocating, including the broken largely unbacked, except with taxpayers money, fractional reserve banking. Your comment, as far as I can tell, is ample evidence of how ignorant most people are of issues related to, money supply, fractional reserve banking and the very real differences between gold and government paper.
Call me a Libertarian or anything else you'd like, but I'd be more than happy to receive all debts in gold or a currency backed by gold. I'd also like to live in a land where that was the standard, free at long last from central banks and despite your thinking otherwise, the fiat paper standard, the US has been on since 1971.
The fact that the poor befuddled masses have been kowtowed by a technocratic elite serving a Leviathan State, hell-bent on inflating and destroying the value of hard earned currency only spurs me on in my freeman’s fight to put a stop to so-called government protected free market in banking that you advocate allowing to continue. It is really nothing more than a government backed swindle, replete with legalized fraud, embezzlement and worst of all counterfeiting.
Published: October 10, 2008 5:05 PM
As long as we are talking about what Libertarians want... Can someone tell me if I am correct... Technically Libertarians shouldn't vote. see "Discourse on Voluntary Servitude."
Published: October 10, 2008 5:07 PM
Billwald,
None of you gold advocates ever admit the unit price to convert back to a gold system - $40,000/oz? If the US was to change the gold in private hands would be confiscated.
The advocacy should be for a free market money system. It is irrelevant what the dollar to gold conversion rate would be, as long as people agree to use either one freely.
If the system was changed approx how many dollars per capita would be in circulation? Enough to pay every worker once a month?
You ask this as if you expected people to be paid in coin. You cannot be serious, or rather, you do not understand money.
"The market will decide" doesn't cut it because until the freak post WW2 conditions the market decided that half of all Americans would be working poor who lived hand to mouth.
That situation was government-made thanks to massive interventions of the economy. You simply chose to ignore that.
That the dollar is becoming stronger with respect to the euro and pound is evidence of corruption, not a basic defect in the system.
Care to explain?
The mess is a product of deregulation, not the electronic money system.
Name one piece of legislation that lead to this "deregulation". By the way, "deregulation" means THAT, and not simply a substitution by a different regulation.
Published: October 10, 2008 6:35 PM
Andy:
Perhaps there are ways to enforce a gold contract. But clearly you can't create your own currency that would actually circulate. And any transfer is subject to income and often sales taxes. You don't have to pay taxes when you ask for change for a $20 fed note. But you would if you exchanged $20 in gold.
The words on the fed notes say it all. "This note is legal tender for all debts public and private".
And then there was the recent raid on the Ron Paul Dollar people. So, just the added risk and transaction costs make the FED note's legal tender laws the key.
Take that away from them, and you and I could do business with Eric or Andy dollars. If we tried this today, we'd be hunted down and severely punished. We'd likely find ourselves in orange jump suits sitting in Cuba.
As to voting, as long as it's not yet compulsory (it is in some southern hemisphere countries) I don't think libertarians have any problems with people that want to vote.
With libertarians, the deciding principle is always, "show me the force". If there's (non-defensive) force, then lib's ought to be against it. Sans that, it's live and let live.
Of course, the people that get elected violate the libertarian principle of force, but that a secondary issue.
Published: October 10, 2008 7:09 PM
Mike:
The US FRNs are fiat currency, in that they are current (legal tender) for United Stated Dollars (i.e. gold coins coined by the Federal government under its power to coin money and regulate its value) by government fiat (and unconstitutional fiat at that since the US Federal government has no power to make anything legal tender). Fiat money is not unbacked money, it is money that is legal tender by government fiat. Under historical monetary law in England and the US and commonwealth countries, metallic money was legal tender, i.e. the standard of value, and paper money was a payment media that may be commercially accepted but is not a monetary standard or legal tender proper. Making paper money legal tender required an act of the government power or government fiat to make it so.
There is nothing unlibertarian about advocating the gold standard. Under natural market evolution gold emerged as the highest form of standard money. In the same way under natural market evolution and legal development under common law, a great number of legal rules and standards have emerged. As libertarians seem perfectly comfortable advocating common law and its rules and standards, why not also the gold standard as a rule of monetary law? (Of course in advocating the gold standard libertarians need not be advocating restriction on a silver standard or other possible monetary standards).
Legal tender laws today are effective: they price central bank notes the same as gold coin, i.e. at par, when the market price is not par. As a result, gold is displaced as money: this is the problem and the means that gold and the gold standard was displaced.
Published: October 10, 2008 8:13 PM
Eric:
I assume we agree that there is a clear difference between a law that says "Bakers must accept paper dollars for a loaf of bread" and one that says "Bakers must accept ONE paper dollar for a loaf of bread." The second law clearly robs bakers. The first does not, as long as the baker is free to say how many dollars he will accept for a loaf.
You ask what prevents private banks from issuing paper money. The National Banking Acts of 1861-63 placed a 10% tax on paper dollars issued by state chartered banks, and required 110% collateral for paper dollars issued by nationally chartered banks. Nowadays, I have heard that there is no longer a federal law against private paper dollars, but any bank that tried to issue paper dollars would probably have to run a gauntlet of state laws, so they don't try.
Even though various countries prohibit private paper money, they can't stop competition from foreign money. The dollar, for example, is widely used in Mexico, in spite of Mexican 'legal tender' declarations. Where countries are small, weak, and close together, competition from rival moneys would prevent any one money from becoming more valuable than the assets backing it, and legal tender laws would clearly be ineffective.
As for taxes: Historically, many governments have issued new paper money, and to give it value, they declared that the government would accept it in lieu of so much silver. Given that you have to pay the silver anyway, you are no worse off if the government gives you the option of paying in paper. Now, if those governments had required private individuals to accept the paper in lieu of so much silver, that would be robbery. But when the declaration applies only to taxes, it's a different story.
Published: October 10, 2008 8:27 PM
Mike and Mark,
GM has assets of 136b and liabilities of 193b for a net deficit of 57b. Not a good example of normal valuation of securities. It also makes big losses and is likely to continue to do so, so I can't figure out why the stock has a market capitalisation of 2.77b.
Mark,
Debt securities are priced differently from equity securities: if the debtor is solvent and the debt is repayable on demand, the security will be priced at par, regardless of the debtor's book-keeping system, asset quality etc. since the debt security is an obligation to pay a particular amount of money on demand, its value in money is at par. On the other hand equity is merely a right to distributions of residual income or capital, which could disappear or be subject to a lot of risk, thus the value of it is not closely tied to book value per share.
Paper money is in the form of promissory notes payable to bearer on demand, and thus is priced at par unless the issuer is insolvent or in default.
Published: October 10, 2008 10:21 PM
Fephisto:
You're seeing further (and more clearly) than the rest.
Anyone who wants the Gold Standard votes, though unknowingly, for "more of the same." The Standard is but one phase in how we got to where we are now.
As to what should be money--that's (should be) up to the market. But if the past (and people's behavior exemplified in the past) is any indication, it would be gold (no "standard" required). The fact is that are, technologically speaking, better off than we ever have been to have a working mono-metallic monetary commodity than at any time in the past--all without the slightest involvement of authority (other than the abstention from interference).
Published: October 11, 2008 8:57 AM
Mike:
You said: "I assume we agree that there is a clear difference between a law that says "Bakers must accept paper dollars for a loaf of bread" and one that says "Bakers must accept ONE paper dollar for a loaf of bread." The second law clearly robs bakers. The first does not, as long as the baker is free to say how many dollars he will accept for a loaf."
Ok, let's look at this point. As long as the government doesn't force you to buy things at a set price, there is no damage done by the FED - presumably. That they create money out of nothing and then force people to use that money for all debts, public and private is not theft. It's ok, I guess, because you could always stop using money and resort totally to barter.
What you ignore is the violence threatened, and force used to keep me from buying these same things from OTHER sources that might offer a better price. The baker presumably has a bakery store and must pay taxes (directly or through rent). The government says how many FED notes the baker will pay. That effects the baker's costs and therefore the price he can afford to accept for a loaf. And they make sure there are no tax-free competitors to the government-controlled bakeries. It may not be total control, but it still is controlled.
And guess what, the amount of that tax goes up every year, because the value of the dollar goes down every year from inflation. In effect, some of my money was taken.
I also have only one choice of where I can buy electricity, gas, water, and even trash collection. This lack of choice is also forced. And these are government run utilities, which only accept payment in FED money. I have but one choice here as well, either pony up whatever they want to charge, or do without. Not much of a choice.
So, it would seem to me that your argument is invalid, since I've just shown how the government does, in fact, force you to pay for things and (at least partially) sets the price you pay.
But along the way, there is also great waste as the function of prices is subverted and lots of mal-investment occurs. And it is the mal-investment that is making the financial news these days. Soon, we are likely to see the delayed symptom of soaring price inflation. It's bound to come, unless economic law is wrong.
Published: October 11, 2008 2:21 PM
David Hillary:
The dictionary definition of fiat money is, as you said, money that is created by government fiat. But what interests economists is the question of why such money has value. Everyone from Mankiw to Mises says that money gets its value from supply and demand, and not from backing. Their working definition of fiat money is that it is money whose value is created by its usefulness as money, combined with a limitation of supply. When I say that the paper dollar is not fiat money, I mean that the paper dollar does not get its value from supply and demand, but from its backing--specifically the assets held by the Fed. I do not mean that it was not created by government edict.
Note that I am not alone in dismissing legal tender laws as irrelevant. Mainstream theorists have seen legal tender moneys lose all value too often to believe that money's value can be supported by government edict.
A simple arbitrage argument supports the backing view. If, for example, some institution was able to issue paper guilders in exchange for assets worth 1 ounce of silver, and if those paper guilders traded in the market for anything more than 1 ounce, then the issuing institution could earn a free lunch by issuing more of them, say for 1.1 oz., keep 1 oz. on hand as backing, and spend the 0.1 oz. on ferraris. Furthermore, rival institutions could issue competing moneys and get a piece of that free lunch. The only stable solution is for paper guilders to be worth 1 oz.--to be worth their backing.
Whether a gold standard is unlibertarian depends on whether it is forced on people. But surely you agree that it is unlibertarian to prohibit silver standards, or to enforce 100% reserve banking even when banks and their customers want to use fractional reserves.
Published: October 11, 2008 6:21 PM
David,
I'm glad you’re able to conclude for yourself a current estimate of GM's value with the caveat that this ought in a free market be unusual. You have managed to reinforce the thrust of my original statement that there is in today's credit-fueled economy, a distorted attempt to appraise what in reality ought not to exist. How can we valuate what has no value save for the befuddled attempts of a misguided attempt by the Fed to stimulate activity by injecting more liquidity and lowering interest rates to stimulate even more irresponsible lending practices?
Again, it’s commendable that you’re able to recite the difference between debt and equity securities but and what should be in a truly free market. Unfortunately, we are not operating in a market free from the undesirable meddling of both government and central banking. This skews all attempts to apply economic certainty to our activities and distorts the economy and markets in which we might care to operate. This monopolizing activity of centralized banking has created the uncertainties we now face as well as the certainty that as long as it continues, we will all continue to be victimized by inflationary trends that continue to sap the vitality from even our most diligent and productive efforts.
As regards the bearer’s notes we call dollars, in my lifetime each dollar has lost 87% of its value and its issuers promise to pay on demand is of increasingly dubious quality so much so that even treasury notes face downgrading of their quality. What we truly need is for government to get out of the banking business, a liquidation of the Federal Reserve System and a return to the gold standard. Such a transition would not be without some pain, deflation must ensue to bring us back to reality after decades of inflationary distortions to the economy. We either take the bitter medicine to restore our economic health or continue drugging ourselves, ensuring that the eventual collapse is even deeper, longer and more painful.
Published: October 11, 2008 6:32 PM
Mike Sproul is impervious to being told that what he calls "assets" backing the US dollar... are nothing more than other fiat instruments, which are similarly backed, and so on. Ultimately the regress is not infinite because it ends up being allowed for use in paying taxes... which is a crystallised form of the governmental monopoly of violence. In the end, it always does just come down to the government's "because I say so". There is nothing else in there, apart from layering to distribute the load. There are no assets with independent non-fiat existence doing any backing.
Published: October 12, 2008 1:27 AM
Eric:
"That they create money out of nothing and then force people to use that money for all debts, public and private is not theft. It's ok, I guess, because you could always stop using money and resort totally to barter."
You could also use foreign moneys, or even pay all your bills (and taxes) with derivative dollars like checking account dollars, credit card dollars, or eurodollars. You'd never have to use a green paper dollar. You might reply that banks have to hold reserves of green paper dollars against the checking account dollars they issue, but when it comes to credit card dollars, and especially eurodollars, reserve requirements are negligible or nonexistent.
But your main point, that the dollar is created out of nothing, is not correct. If I printed fake dollars and spent them, without getting bonds or gold in return, and without standing ready to use those bonds, and possibly even the gold, to buy back those dollars, then I could be validly accused of issuing dollars out of nothing. But the Fed issues every new dollar in exchange for a dollar's worth of gold or government bonds (until recently, that is, but that's another story). The fed has enough assets to buy back every dollar it has ever issued at their current market value. When central banks cannot buy back all the money they have issued (e.g., Zimbabwe), then the currency loses value, but the fed is not in that position.
Published: October 12, 2008 10:36 AM
The problem really isnt even fiat money, it is the fdic insurance system. Had we used gold, paper, or pictures of rosie odonnell beating beating senseless as money it really wouldnt matter. The banks are not ALLOWED to go under. We need free banking far more than we need paper money.
Published: October 12, 2008 2:56 PM
The problem really isnt even fiat money, it is the fdic insurance system. Had we used gold, paper, or pictures of rosie odonnell beating beating senseless as money it really wouldnt matter. The banks are not ALLOWED to go under. We need free banking far more than we need to get rid of paper money.
Published: October 12, 2008 2:56 PM
Mike Sproul just wrote "But the Fed issues every new dollar in exchange for a dollar's worth of gold or government bonds (until recently, that is, but that's another story). The fed has enough assets to buy back every dollar it has ever issued at their current market value."
See what I mean about 'Mike Sproul is impervious to being told that what he calls "assets" backing the US dollar... are nothing more than other fiat instruments... There is nothing else in there, apart from layering to distribute the load. There are no assets with independent non-fiat existence doing any backing.'? (There isn't any actual gold in there, apart from a very small stock which is not available for release as backing.)
Published: October 12, 2008 7:43 PM
Mike:
What I and others mean by backing is what the old US dollar used to have, a promise to exchange that dollar with some amount of gold or silver.
Today, all I can get for a fed dollar is another fed dollar.
So, what is backing the fed dollars is nothing more than promises by the US government. And we all know how much a US government promise is worth.
How often has this deadbeat government lied. It used to promise to redeem notes in hard money, but it broke that promise. It even confiscated gold from people that wanted no part of the federal reserve system. It then refused even to honor the promise to redeem to foreign banks and governments.
This is no different that saying the mafia protection racket and its potential income is backing up the fed notes. But what hope do you have that this backing will ever be redeemed, and as you said, today they are even going to be buying up worthless mortgage ious. So, if you want to say that fed notes are backed up by worthless promises - but promises nonetheless, then I will give you that point. But the market always discounts promises. And when the one doing the promising is such a liar, and a spendtrhift, how can their ious be worth much?
Published: October 12, 2008 9:41 PM
Eric:
You are confusing backing with convertibility. If a bank pays out 1 ounce of silver for each dollar it issues, and if it has enough assets to buy back every dollar it has issued, then those dollars are backed and convertible. Over the weekend, when the bank is closed, those dollars are inconvertible, but they are still backed by the bank's assets.
If the bank stands ready to buy back its dollars with silver, the dollars are physically convertible. If the bank stands ready to buy back its dollars with bonds, those dollars are financially convertible. If the bank occasionally sells silver in exchange for its own dollars, those dollars are physically convertible at the banker's option, not the customers' option.
So when you say that the dollar is unbacked, what you mean is that the dollar is not physically convertible at the option of the customer. This ignores about a dozen other kinds of convertibility that the fed does maintain. It also ignores the fact that the fed, like all central banks, holds assets against the money it issues--a practice that would be unnecessary if money's value were determined only by supply and demand.
In the end, as you say, dollars are backed by the promises of the US government, be it the promise to use bonds to buy back dollars, the promise to keep gold in the fed, or the promise to accept dollars for taxes. These are all uncertain things, maybe even criminal things, but they still have value, and that is why the dollar has value.
Published: October 13, 2008 12:36 PM