Monday, October 21, 2013

What is a dollar? A difficult question, with a depressing answer...

George Washington couldn't tell a lie (supposedly), and the man on the five is "honest Abe." You'd think that the basic units of our currency would have something to do with integrity, or at least a kind of trust. I don't think this is the case however, or at least not any more, and the situation we've found ourselves in with currency, as a country, has the potential of getting a whole lot worse. The problem arises when you ask the seemingly innocent question of what a dollar is.

Allow me to first illustrate what I mean by analogy. For variety's sake, I'll try my hand at emulating old Aesop (while we're talking about old historical men):


The Fox's Pepples

A cow, a dog, and a fox lived together. The cow produced milk, the dog provided security from wolves, and the fox provided them with pebbles. A pebble, the fox explained to them, holding one up, is a unit the three animals could use to measure and keep track of their contribution to the farm. It had no value itself, but represented real value. A gallon of milk from the cow would be worth 3 pebbles, and a day's worth of protection from the dog was also to be worth 3. "My service of providing, maintaining, and balancing a serviceable amount of pebbles, is worth 4 pebbles a day," said the fox, and the animals felt that this distribution was fair enough. And so life went on for a time, with the animals paying each other for their services in pebbles.

Soon enough, however, the cow and the dog realized that while they had to save up enough pebbles to buy security or milk, the fox had a seemingly endless supply. "Where do you get all of these pebbles from?," asked the dog one day. "You buy as much milk in a day as I can afford in three, and you only make one third more than I do." The fox replied: "I get more pebbles to spend by making them. I go to the river and retrieve as many as I want and come back in five minutes." Noticing the alarm in the dog's expression, the fox recovered: "Ah, don't worry about perceived unfairness, my friend! It's all very complex and mathematical, but it's fair, I assure you. Besides, I'm bringing pebbles onto the farm that ultimately pay you for your work. It's for your own benefit."

But the cow was unconvinced, realizing that she would never attain the real value promised by the pebbles she had been given, and she was angry about the deception. "You told us all this time that pebbles represented value. Now I see that they only measure our gullibility!"

At the risk of ruining the allegory by explaining it, I'll try to put my little parable in context. There are essentially two kinds of politically involved people in the United States, for the purpose of our discussion: people who are mortified at our national debt, ringing in at $17 trillion and growing by over $1 trillion more per year, and people who think that the debt literally doesn't matter at all. Why does the debt not matter? Because, they say, the government can just print more money. They can mint as much as we need. As much as they need.

Here's where definitions become important. Back in the day, a dollar used to represent a fixed amount of gold or silver. We've since moved on from that, but the idea that monetary units represented value has been the persistent underlying idea behind money. If it didn't represent something, why would I care how many little green slips engraved with the faces of dead presidents I possessed? But typing in a number and pressing a button doesn't create value. If I make a pair of tennis shoes, that creates value, and I can use twenty five dollars that someone else purchased my tennis shoes with to accurately represent that value. Creating money doesn't do that. That's why we have laws against counterfeiting, after all.

So when people say "don't worry about the debt, we can just print more money to pay it off," what they're actually saying is far more cynical than that. What they're saying, in a way, is that money doesn't represent actual value anymore. So why does it matter? What does money represent? Trust, they might say. Or at least that's the answer I've heard most often when debating the issue. Money doesn't need to represent actual value because the government is basically too big to fail. Yes, people actually say that, even after 2008. Another family member recently told me that dollars represent units of energy moving through the economy, but even this is a kind of trust; trust that the market will continue to always move faster, if you're going to use that as a justification to print more money.

Except what they're talking about is people's trust in some kind of value that may or may not be there. As we pump more dollars into the economy, it's increasingly likely to be the latter. So what dollars will represent if we attempt to buy our way out of our debt by printing more money? Dollars will be a metric for public credulity and naivete. Dollars, instead of being units of value, will literally be units of gullibility.

That's in philosophical principle, of course. Pragmatically, they'll still represent value. Just a whole lot less.

It's the story of every market bubble: people assume on faith that something can't fail,when it does or will only go up, or, most reprehensibly of all, that when it does finally crash in a fiery explosion of death and destruction, they'll be one of the smart ones ready for it, having played everyone else along the whole time. They'll have a chair when the music stops. Obviously, this was what the bankers and credit-raters were banking on several years ago; the problem was that thousands of people were looking at a dwindling number of chairs, knowing what was coming, and dancing as though the music would never quit. Surprise! It did, and left them standing there looking stupid for refusing to look reality in the face. Now, I'm no economist, and I don't know what a monetary bubble-burst would look like in comparison to the sub-prime mortgage credit bubble, but $17 trillion sounds like a  lot to me. At the rate we're going, we could find ourselves at $20, or even $30 trillion dollars of national debt in the next few years, and that's only national debt. We're completely ignoring private debt, which also operates almost exclusively on guess which currency? Yes, the very same dollar.

So how to handle the debt becomes a question that our politicians and, more importantly, the populace that elects them, will actually have to address instead of running away from, or throwing the weight of responsibility at the next generation. Do we want a functional monetary system and universal unit of exchange or not? If the answer is yes, and I suspect that it is for all but the most antisocial members of society, than fixing our debt isn't something we can wave a wand and hocus-pocus our way out of. It will require a great deal of pain and sacrifice, and how that suffering is distributed among the different parts of society is a question that might deserve its own debate. But the decision, with any wisdom and foresight, is really not an economic decision at all. To go for an actual fable of Aesop's, it's about whether we want to be grasshoppers or ants. The grasshopper, dancing and chirping through the summer and the fall, laughs at the ant's silly and dreary pragmatism and toiling preparation right up until winter comes. The decision is whether we want to think in the present like toddlers, fooling our selves in measurable units of credulity, or plan for the future like adults.

The currently trending choice between these two among our politicians isn't looking good.

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