Macro Economic Trends and Risks
What's the Value of a Dollar?

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By EddieLuck
May 2, 2008

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In the last week I have read articles by Mish, Doug Noland, and Steve Saville on the recent rate of increase of money/credit supply. All these three guys are highly intelligent and widely-read on economics. All three spend a lot of their working time on Macro economics and try to get things right.

The three articles, all well-reasoned, reached three entirely different conclusions (contraction, mild growth, rapid growth of the money/credit supply) that cover the whole spectrum of possibilities. They prove beyond a doubt that it is difficult, or even impossible, for us to tell with certainty whether "money" has been inflated recently, and if so, by how much.

Seeing that money itself is the basic measure or unit of all commerce and industry I am more convinced than ever that our current hodge-podge of money-creation and credit-creation schemes is so irrational, haphazard, opaque, and just plain stupid that it imposes a burden on all commercial logic and investing rationale.

The meter was originally defined in Napoleon's time as the length of a bar of platinum stored in Paris. IIRC it was replaced by a definition related to a certain wavelength to enable more portability and precision in measurement. Fair enough. Similar definitions exist for the ounce, the second, the acre, the octave, and so forth. All well and good.

The dollar was originally defined as a certain mass of gold. This definition has never been changed to my knowledge, but dollars are now some sort of conceptual, virtual units of no fixed value, that cannot be measured or defined. They exist in unknown, ever-changing quantities, and will soon have more varieties than Heinz.

What is cash? Opinions vary.

How in tarnation can we pursue human commerce on such a loopy basis? Could ANY monetary system have less rationality or more opportunity for abuse and theft? So many writers have disparaged the use of seashells as money but they are infinitely preferable to what we have, because everyone knows what seashells are and understands their production rate and so forth. We are all being ripped off right in front of our noses. It is no coincidence that standards of living stopped improving at the same time that money was divorced from any standard of value in 1971. It is no coincidence that ever since that time, debt has been on a relentless exponential climb.

It is also no coincidence that after thirty seven years of this madness we are facing financial and economic distress that is so complicated and opaque that all the experts are arguing their entirely different opinions about what is happening. This is not normal in a rationally-based system. Ignoring for the moment the fact that we would not be having a housing finance bust or a credit bust in a real sound money system (without fractional reserve banking), at least when we had a financial problem while on the gold standard (like for instance a deflation caused by a gold shortage) we would all be able to identify the problem for what it was. This would be a good start for everybody trying to survive the problem.

In our present situation, there is very little consensus about whether we have a problem, how bad it is, what caused it, whether and how to fix it. Also, the inflation rate is questionable and a matter of opinion. This is ALL because we have no basis of measurement worth a dam with which to even make a clear macro analysis. Further, it is almost literally true now that we "don't know what we are talking about" because finance has reached a point of complexity and absurdity beyond the average person's comprehension. Remember when the CEO of Citicorp had never heard of some kind of derivative that his bank owned a lot of?

I predict that things will get progressively more chaotic from here until we are forced (by horrible events) to return to a definition of money that pins it down to a constant value of some kind, as we do with ALL other units of measurement.

Right now we are so close to chaos, store price labels might as well say "reduced - now not much money" or "a medium amount of money" or "hardly any money". These labels would be hardly less descriptive than "five, ten, or two dollars".

Good luck,