Money makes the world go round. The amount of truth of that statement is debatable, but the importance of money and currency in our functional practical existence is difficult to overstate. Each day and increasing percentage of the world population is being dominated by monetary concerns and realities.
Yet, money in all forms in this global economy is becoming increasingly arbitrary, and the more you investigate money the more fictional it appears. The fact that our lives are being increasingly influenced and dominated by fiscal concerns should be very alarming when you consider to what degree money is becoming a complete an arbitrary fiction.
Not many years ago most nation’s currencies were at least based on something tangible. First, coins in and of themselves, are/were minted in a metal which had inherent worth, even if it did fluctuate. The inherent value of the metal was an incentive for people to accept it in exchange for other tangible goods such as food, or for payment for work done or services provided.
Money has always been more of a fiction in that it’s stated worth was always much higher than the value of the paper it was written on. Yet, most currency’s paper money was backed by a tangible asset of value such as gold or silver, where if you went to a bank they could exchange your paper currency for a specified amount of gold or silver.
Most nations no longer have their currencies and money supplies backed by gold or silver, or any other tangible good. The worth of a dollar is truly arbitrary and just means that one can exchange that piece of paper for a dollars worth or food, services, etc. In practical terms all current US money is just an IOU (I owe you), a promise that your paper is worth something.
An IOU is a debt, therefore, all dollars are debt instruments rather than having inherent value. This fact is clearly stated on every dollar in the phrase “This note is legal tender for all debts public and private”. All modern currencies are debt instruments and IOU’s with no inherent value or only on an arbitrary stated value.
All current money printed and placed into our economy is borrowed from the Federal Reserve and other Central Banks which the US and other host countries have to pay back to these entities with interest. These entities such as the Federal Reserve are not governmental agencies but rather private banking institutions who our government contracts out with.
Modern money is now introduced into an economy though an act of borrowing. Money has become solely a debt instrument without any inherent worth, therefore, money would cease to exist or have value if all debts were paid off. Though that statement seems a bit exaggerated, it is functionally accurate because a dollar has no significant value (it’s paper), and is no longer backed by anything of value (such as silver or gold). It’s role and function is solely as an IOU or a promise of a stated value to be exchanged. People now only accept your money because they have faith in the promise made by the government and are willing participants in the great game of make believe called modern capitalism.
Yet, the above discussion only scratches the surface of the degree of the monetary fiction that we base our functional existence on. Even the total number of dollars in existence is a fiction. The percentage of the trillions of dollars theoretically in existence that are actually on printed paper is but a fraction of the total amount.
The actual number of printed dollars in the US economy is about 860 billion. Supposedly this number gets doubled when you add all the currency kept in bank vaults and other lending institutions. Yet, since we live in a world of “fractional banking” in which banks only have to keep a very small percentage of people’s saving accounts, etc. on hand (less than 1%) than 860 billion figure remains fairly reliable.
This means the bulk of the trillions of dollars supposedly in our economy is not even printed on paper. In essence the great sea of dollars that supports our economy is a fiction of a fiction, or a fiction squared if you will.
When considered this way it is easy to understand how when the stock market tumbled last year trillions of dollars just vanished into thin air. All those dollars weren’t even physically there in the first place and their existence and non-existence is just a statement or a result of theoretical electronic transactions.
The recent stock market tumble erasing an estimated trillion dollars in less than 15 minutes becomes understandable when you consider how arbitrary money is. Just think about that a moment in fifteen minutes the stock market lost more than all the printed dollars currently existing in our society outside of banks.
If that doesn’t bother you, then I guess nothing will.
I have spent the last few years educating myself on the history of stock markets. I have also spent time trying to understand the markets through pattern recognition and technical analysis. From both of these perspectives the events of the last two weeks and the last two years have not been surprising. Though I am incapable of predicting the day-to-day movement of the markets, from a historical perspective I feel quite confident in saying that the stock market has a long way to go before it hits its bottom. Even if it rose to new all time highs some devastating lows still loom in the foreseeable future.
Global economies are inherently complex organisms. With complexity comes danger. Yet, the danger becomes impossible to manage when you’re dealing with fictions of fictions.
Jim Guido
Thanks for the piece. People got to wake up and demand an overhaul of this illusory financial system we’ve come to depend on…..BTW, it’s not too late to invest in silver….:-)