This essay is based primarily on a book The Ascent of Money, by Naill Ferguson, and my own life experience.

It is very possible that in a free market economy virtually all the money can become restricted to a minority of the population who enjoy richness while the rest live in poverty. This was the condition of the European aristocracy through most of it’s history. This predicament spawned the philosophy of Karl Marx. This is the danger of the free market. It’s no wonder that the Adam Smith’s concept of the free market was so appealing in America where there were so many natural resources and there was so much room a man could independently develop wealth off the land. Ultimately, a sound economy must produce the opportunity to provide the basic needs of the entire population: food, shelter, waste removal, activity, sex, safety, belongingness, power, achievement, knowledge, encouragement, beauty, and creativity.. entitlements. The most successful governments of the world are a mixture of capitalism and socialism. The capitalism promises the possibility of individual financial success while the socialism maintains a broad economic base in the population. People can quickly become used to and demand financial independence from work. This is the danger of socialism. The recent trends indicate that there are thousands of billionaires and any thousands more of people making over a million per year. It is my understanding that a third of our global economy is engaged in finance, which does no work.

Originally it was thought that government should do no more than run the military, tax the population, and make a few laws. Since that time the government has become also required to institute reasonable regulations and licensing, and maintain a sound economy.

It doesn’t matter what form of economic system is in place, unethical people will always find ways to avoid regulation, cheat and loot the process. Is it not true that ultimately a sound economy must produce opportunity to achieve our basic needs? In most companies, the employees own nothing and are furnished with what they need to work. This is a very Marxist idea yet exists in a capitalist free market. These left and right extremes of the populous philosophies of capitalism, socialism, and communism are becoming suggestive of mythologies. The rejection of any suggestion of socialism has become religious dogma among the “conservatives”. However, it is the invisible hand of the free market that sounds more like a superstitious idea.

From the best of my understanding, from 2000 till 2008, we experienced the greatest cash give-away since the Roman Empire. There is nothing like giving trillions of dollars away with little, or no, expectation of it being paid back to boost an economy of anything to do with construction, finance, tax coffers, and everything else. Everyone was building. Now that, suddenly, these many debts are being defaulted and consequently the banks have been depleted of all their money (their liquidity) we are now faced with the real economy that requires something other than just hyper-inflation in the real estate market. We are not experiencing a recession; we are presently experiencing our actual economy. Much of our work has been quietly outsourced to other countries with the blind idea that even though they were making a profit, they were not making enough of a profit. It has been said that the free market has no morality. But we are moral humans who will experience the consequences of our immorality and should not be seduced by the dogma of the free market. So let’s look at some of the basic concepts of economy and see if we can sort this out.

The Gold Standard

We can’t eat, or use Gold any more than we can eat currency. But Gold is limited in supply, difficult to produce, and thus has the ability to restrain the overproduction of currency that it represents. Yet, historically, when precious metals are found in abundance and placed into circulation inflation occurs. Inflation occurs when the supply of money exceeds goods and services.

US Currency left Gold in the thirties. Gold’s value was released (unfixed) in the seventies. US currency was dramatically redesigned to resist counterfeiting about the time ‘copy machines’ became sophisticated. US currency has now essentially become the ‘Gold’ that every other currency uses for a standard for several reasons.

1) Many other currencies become valueless when their governments are overthrown. The US government has a strong military and has, for centuries, remained stable enough to back it’s currency.

2) US currency is extremely difficult to counterfeit; and, like gold, is thus stable and controlled in it’s amount.

3) US currency has never been overproduced (to the point of causing hyper inflation).

4) US currency is consistent in appearance.

5) The USA government is looked upon idealistically.

The influence of US currency has been expanding in acceptance throughout the world and has been stock-piled by other countries as a stabilizing influence on their economies.

Banks Make Money Expand

I’m going to create a very simple explanation. A bank has $200,000.00 and loans it out to Joe. Joe puts it in his bank, which loans out $180,000.00 to Mary and keeps $20,000.00 to cover depositors. Mary puts it in her bank which loans out $160,000.00 to Bill and keeps $20,000.00 to cover its depositors. This goes on, each bank keeping $20,000.00. If my math is correct, this will eventually result in over a million dollars of capital when there is still only $200,000.00 in existence. This phenomenon last longer if Joe, Mary, and Bill repay their loans. This is called “fractional banking” because the bank keeps a fraction of the depositor’s money. According to one chart I saw from the St Louis Federal Reserve Bank, the banks are packed with money but have not loaned much out.

The Speed of Economy

Imagine 100 people in a circle, each with $10.00. Each passes their $10 to the person on their left every 30 seconds. That means every participant ‘makes’ $20 per minute. If this passing of the ten dollar bill is every 10 seconds, the participants will only be ‘making’ $60 per minute. Many people live paycheck to paycheck and pass their money along each month. I believe that the evidence for this slowdown occurring is the climbing percentage of savings and the lack of liquidity in the banks. The real estate business was a hyper-accelerated circulation causing hyper inflation in real estate. If repayment of the mortgages had been a matter of concern, the real estate sellers would have not seen the business they experienced.

Economic Terrorism

The last point I want to bring up is based on the same type of guessing that I did when I watched the price of houses skyrocket and wondered when they would run out of millionaires. That guessing was naïve, and so might this be naive.

On one Saturday I was out in the car listening to AM radio and ran across my old pal Rush Limbaugh who I haven’t listened to since the mid nineties. He never failed to give me a belly laugh back then and tell me something I didn’t know. But, he was so angry and adamant about the threat of ‘socialism’ and its association in his mind with the Obama presidency that he was ranting and spitting into the microphone in anger that Obama must be stopped at all costs. This vitriol went on till I couldn’t stand it anymore. Since then I have heard other radio personalities encourage people not to buy GM products, for instance. The pandering to fabrication and fervor exhibited against the “liberals” (whoever they are) is reminiscent of Hitler’s ranting against the Jews. That bothers me. Fortunately, Limbaugh, and his ilk, have no private army.

I am not going to undersell influence of this propaganda, nor am I ever again going to assume that people who are influential and wealthy are wise and knowledgeable. I believe that there is now a segment of leaders in our country who would rather see a deep depression than an economic recovery. They are laying off as many people as they can with their own overblown understanding that they are untouchable and that this will eventually lead to their new world of free markets, or whatever. I don’t believe this is a conspiracy, I think it is a human phenomenon, similar to those who show up at town meetings and yell, “you are a Liar!”, with no other reason to do so than to do it.

I wonder when the whining ‘right wing’ personalities are going to encourage their listening entrepreneurs to go out and “show those liberals” what can be done with individual pursuit of excellence. According to evidence I’ve seen the banks don’t make loans for fear of risk assessment and the lack of inquiries, I assume. In my mind, the division of “left” and “right” is pure entertainment and a symptom of a lack of mental comprehension. It’s much easier to see the world in black and white than to unravel the grey to seek reality.

The Creation of Money

In the United States this is done by printing currency or printing checks. I have heard, this requires, by law, that the Congress of the United States permit such creation.

One such permission is funding war. It was the World War Two which brought us out of the ‘great depression’. WWII cured the unemployment problem, produced technological advancements spurring consumerism after the war, and created well paid jobs with no place to spend their money till after the war. If Roosevelt’s New Deal was measured in billions of dollars (and it was), WWII was measured in the trillions of dollars. Yet the grandchildren of WWII veterans have not been burdened with repaying that enormous ‘deficit spending’. The Vietnam War produced a great economy as well as inflation (in the Carter years). Billions were spent on that war and there was no tax burden on the population. The same thing happened during the Iraq war. Taxes were actually reduced.

I think other Congress approved spending, appropriate for creating money, includes Social Security, Medicare, and the repayment of US Bonds.

I’ve wondered why economic theorists don’t study what happened during WWII to see if we could produce such an economic effect without a war. War is typically caused by the need to destroy an unattractive societal philosophy, such as the Nazi’s, Communists, or Terrorists, for instance. The economic benefits are 1) a cohesive plan that requires employment (To some degree, due to war, wages are high, savings are high, money is being created, consumer demand is pent up, and new technologies were attractive after the wars) 2) a motivation to create and implement technological advances through competition with an enemy (leading to technological advances in peace), 3) destruction which later requires rebuilding, 4) there is excess money after the war, 5) there is an increase in demand for goods and services after the war (similar to a natural disaster, like a hurricane or earth quake).

Recently I heard that there are three drives that engender creativity, 1) War, 2) fear of death (medical technology) and 3) ideological pride (such as religion: churches and the pyramids, and nation: buildings and monuments).

Reasons for Creating Money

1) The increase of a population that uses the money. Consider a group of 100 people, each with a dollar. Then consider the group expanding to two hundred people. Now each has 50 cents. We need another hundred dollars. It is my understanding that people are flooding into Europe and US from poor countries increasing the population.

2) The increase of a population to whom the money is important (the increase of influence). Consider ten imaginary countries that base the value of their currency on the dollar. The national production of each nation becomes acceptable to the others on that basis. Now the number of interested countries doubles in number. Once again, the money needs to be created to accommodate them. The USD is the gold of the world. Countries such as Argentina have actually used the USD as their national currency when their own currency was in hopeless inflation.

I am basing this idea on the glut of US money (many trillions) available from international sources to purchase mortgage backed securities from the Wall Street Guys. It is my understanding that, world wide, there is somewhere around 47 trillion USD out there. AIG (which insured these securities) was bailed out and the money was simply sucked into the world economy. Disappeared. Vanished. Used by other people around the world. It didn’t seem to help us directly, although the bail-out did support confidence in contracts with the US. But this disappearance could be due to other factors such as slow speed of circulation, lack of banking activity, or economic terrorism.

3) The increase in technology. Consider when I left home, at 17, in the sixties, I had a small AM transistor radio and, eventually, bought a 13 inch black and white TV. Today nothing short of a stereo, I pod, TV, and a lap top is acceptable. The greatest increase in technology has taken place in the field of medicine. MRI’s, CAT scans, anti-biotics, etc. are nothing short of miracles and are very expensive. All these technologies require research and development and, mostly, money. Print it up, it is getting used.

When I was a child, a movie cost 25 cents. Today it’s ten dollars. Ideally, without inflation, it should still cost 25 cents. But today, I get thirty times the movie of yesteryear (technology costs), and inflation has certainly happened. Today I make more than my father, a physician, made 60 years ago, and all I do is drive a truck. Money has been steadily created. Sometimes too much. The money of Vietnam finally came back to bite us in the Carter years and caused wide inflation, IMO. When Nixon unilaterally pulled us out of Vietnam, I could have kissed him on the lips. But the years of killing the communists were not forgotten, we now have the terrorists to kill half way around the world. All due to nineteen guys that got lucky on September 11^th, 2001.

I want to comment that the 7-15 percent of mortgages that are flipping cannot be ‘sliced and diced’ to produce only 5 Cents on the dollar that these securities are said to be worth. The only answer to that is that these securities were fraudulently over-sold (why not they are insured) like tickets on an airline and the salesmen looted many, many dollars in commission. And, of course the lenders were cheating on the other end too (why not, they sold the mortgages to Wall Street – taking no liability if the mortgages went bad). But the positive side is the money went round and round and those were great years economically, so why bitch? The banks were literally funneling money printed for Iraq back into mortgages that couldn’t be repaid (giving money away) keeping the finance profession, construction, real estate and mortgage buyers with plenty of money to spend. The front didn’t know what the back was doing, and didn’t care. Due to this activity, there are some beautiful homes that would have never been built. Some people don’t want it to end.

However, even though the government did not include real estate in their estimate of inflation, dramatic inflation in real estate did occur. Houses built in this century are typically large and grand, while houses built in the sixties to the end of the last century are typically the size of apartments with a roof. We will probably return to those sizes.

It has been pointed out to me by people who are first introduced to these ideas that the government should just print up a bunch of money for everyone. The problem is that no one would go to work, of course. So the idea is to put people to work.

The greatest fear regarding the creation of money is inflation. However, if goods and services are expanding at the same rate as the creation of money, it would stand to reason that inflation would not occur. The real art of money handling is there has to be a balance between using created money and money from taxes and bonds (loans). Presently, probably 50% of our economy goes through the government, and needs to be sprinkled with created money occasionally. Recently 1.25 trillion dollars was created out of thin air by the Federal Reserve to buy mortgage backed securities. Of course these will have some return and the final cost will be less than the buying price.

US currency is now the Gold standard of the world. The government has been stable for a long time, the military strong, and the currency is virtually unable to be counterfeited. What we do with this gold should only be restricted by our sense of stewardship and our realistic imagination of what is possible. We are on the verge of a global strength of humanity that has not been possible before. We should keep progressing with bravery, caution, knowledge, and creative understanding.

Why do stocks go up and down?

The stock market is simple, when more people want to sell than buy, it goes down, and visa versa. Unfortunately it has only a little to do with the value of the stock dividends. The rule of thumb is that the stocks should yield around 3-5% of the value of the stock per year in dividends. There are so many stocks held by such a few entities, the rise and fall of the markets does not represent any indication of the mentality of the population, IMO.

Entitlements

As I drive through neighborhood after neighborhood of beautiful subsidized housing it occurs to me that, due to technology and 'outsourcing', we may be considering the possibility that there are more capable people 'out there' than we have jobs. Much of the housing is townhouses built by the city, I’m guessing, sold to the unemployed for outrageous sums with loose money from the banks, never to be paid back, trickling down from the sale of mortgage backed securities, lining the pockets of local politicians, and the building industry, creating a great, but over blown, economy.

The Development of Myths

Myths usually serve a purpose and are arrived at through logical means. An example of this is the General Motors story. GM asked for a bailout. The logical assumption was that this was due to a lack of car sales. This lead to the logical assumption that GM did not make cars that people wanted. Another logical assumption was that the unions asked for too much money and that was a contributing factor to GM’s crisis. In reality, GM’s financial crisis came due to their participation in finance. First they found they could make more money financing the sale of their cars than making them. This arm of their company was called GMAC. This was so successful that they went into the mortgage business as a company called Ditech.com. GM suffered the same liquidity problems as the banks. GM’s problems had nothing to do with their cars. Whenever I hear economists saying, “look what the unions did to GM !”, I immediately know that they are thinking of a myth. People become dedicated to their myths and find them hard to let go.

Other thoughts

Besides the US purchase of Chinese merchandise there is also the transfer of money toward South America for Cocaine. China sends US money back in investments, as did Japan, England, and the Netherlands before China. South America repays loans? I'll bet Argentina sells a lot of stuff to Columbia in exchange for US currency. Mexicans like US currency because their own pesos become worthless every now and then, I am told.

It has been noted that China has “loaned” the US much money. The money it has loaned has been USD, and the form of the “loan” is the purchase of a) US bonds, b) mortgaged backed securities, and c) stocks. AIG, which ‘insured’ these investment ‘loans’ was bailed out because the US doesn’t want US investment securities to appear to be other than what they are sold as.

Since no new economic ideas have evolved since the eighties, we are probably due for a paradigm shift. Technology (reducing the labor required) and a rapidly expanding desire for modern living (whatever that is) throughout the world are relatively stronger players. Some economists have made the mistake to assume that all economic downturns are the same and that the response to them should be identical. However, just for example, economic recessions after the world wars (1920 and 1945) were due to the confusion of retooling and reorganization from war-time to peace time economies. Nothing is required. Other downturns are due to other problems.

What are the causes of the present recession? The lack of liability for loan officers caused banks to run dry, Ponzi schemes, Outsourcing Work, Over Selling Securities requiring an inflated AIG Bailout?

Summary

ok, here's the play.. the US govt created money for the war in Iraq and lowered the interest rate for US Bonds (a very popular investment) to virtually zero, it got funneled back into the US through mortgage backed securities. The "bankers" (people with often little training or experience) were able to loan the money out without fear of liability or running out of money. They sold the mortgages to Wall Street. People were refinancing their homes (with growing “value”) and using the refinance money to make the growing payments and spend. Everything seemed fine to the economist’s charts until the last second. This injected trillions of dollars into the economic activity of people (sub-prime) who had never had money before (pent up consumer demand). Obviously the economy would "grow". Consumer spending through credit (cards and mortgages) became excited.

When the creation of money exceeds goods and services, there is inflation. And that's what we saw in the housing market.. mass inflation. There were millions of people (who are now unemployed) involved in this: the construction industry, the ‘bankers’, and the Wall Street guys, the “loan officers” (none of which saw the big picture apparently) who were making great money and having the time of their life. Barney Frank wasn't the only one who didn't want to see what was happening. Now the party is over.. but there is a solution.

The "bailout" did this: last year there were probably 30 cranes around town for building skyscrapers. There are now two. Part of the bailout was to complete projects for which the banks had run out of money. Another reason for bailout of AIG was to enable the credit default swaps to be paid so that the reputation of 'contracts' with America would be secure. The security of contracts with America is important for the security of the USD which has become the 'gold standard' of the world. But this isn't the solution.

Incidentally, these "bailouts" have been done by countries all over the world. The total world currency has increased from 70 trillion to 86 trillion valued USD ( in yen, deutchmarks, etc. ) or something close to that. You won't find the solution in the left or the right, you won't find it in AM radio’s fervent lying and ranting, you won't find it in most places you look. The problem is that everyone is sitting around thinking, "what do we do next"?

Healthcare

Healthcare can be considered as really starting in 1945. Before that, there was little readily available anti-biotics or anti-histamines. Surgery was basically done as fast as one could because the patients were usually sedated with alcohol. The healthcare plan up to that time was mostly live till you die! Today the picture has changed radically. A case of pneumonia can easily cost $100,000.00. An MRI can cost the uninsured thousands of dollars. There are thousands of people on dialysis at $1200.00 per week. Before 1975, when there were few machines, there was a panel that decided who would get dialysis and who would die. The death panel has been here for a long time and may be busier than ever soon. Due to the rapid increase in expensive medical technology and the difficulties providing service for everyone, there will have to be decisions as to the most ethical use of the funds available. Some people think that the free market will answer this, but it’s a bitter pill. It seems like we are headed for a world where the question becomes, “do you want to die now, or later? Later? Ok, $200,000 dollars, please.”

The point is that with the extrapolation of medical technology, the way it has been, it could cost hundreds of thousands of dollars per person. And the purpose of all this treatment is the extension of life. Even with all this expense, the healthcare insurance companies are some of the wealthiest companies in the world. They charge the high premiums and pay out as little as possible. The government and private charities and bankrupt families pay the rest. This falls under the subject line of new technology and deserves consideration as a reason for printing money as well as printing money for war. Why not invade a country with healthcare?

If you wish to share any thoughts about this, email me at realistic@seanet.com