MONEY MONEY A guide to the economy by Ian Green Copyright 1989 by Ian Green Box 973 Vancouver, BC CANADA V6C 2P1 All rights reserved. Permission is granted to distribute this document in unmodified form on a not for profit basis. All others must obtain prior written permission from the author. Money by Ian Green Page 2 INTRODUCTION INTRODUCTION Do you own your own home? If you do you are almost certainly one of those so-called baby boomers or their parents. Consider yourself extremely lucky, because if you tried to go buy a house today you probably couldn't afford it, even if you made twice what you currently do. The reason is simple, the cost of borrowing money has risen so high that it has completely outstripped the earning power of the average young family. The real question is how did this situation come to be? Sit back and read on, I will tell you exactly what is going on. Some of the things I will present are likely to shock you, but everything contained in this essay is THE TRUTH! There are two major components driving the economy of today. The first and most influential is the supply of dollars. Contrary to popular belief, the supply of dollars has grown dramatically over the decades since the FIRST WORLD WAR. Prior to the war, the number of dollars was solidly controlled by international agreement. This was the last period of the gold standard. Gold has, along with silver, remained the 'official' money of all nations. Dollars, yen, marks, pounds, etc. are all nothing more than money substitutes. Unlike the dollar, the supply of gold has risen only modestly over the centuries. The second major force driving the economies of the world today is debt. The United States of America has emerged as the leading debtor nation, far outstripping the total debt of all the 'third' world nations combined. It continues to grow by hundreds of billions of dollars each year. Combined, the two factors of debt and inflation operate synergistically to erode the purchasing power of the average family. Now you may ask, confronted with these forces against us is there a way out? I would be an out and out liar if I said there was. There is hope but time is quickly running out. Money by Ian Green Page 3 THE RECENT PAST THE RECENT PAST One of the leading themes of the numerous financial reports, that sum up the '80s, is the 'unparalleled' growth in the economy. What they don't tell you though, is that the expansion is due entirely to inflation; the fact is that real earnings have declined considerably. In 1984 for example the Dow Jones Industrial Average was around 850. Today, five years later, it has broken 2700 or more than triple it's 1984 value. Other stock exchange indices reflect similar performances. I can not help wondering if your earnings did as well. In 1984, when I still smoked cigarettes, a package of twenty cigarettes was around $1.60. Now prices of around $4.00 and even more are common-place. Other products tell similar stories. Unfortunately the official 'consumer price index' doesn't reflect realistic levels of inflation. In 1978 the start of the major downturn in the economy was well established. Inflation was rising to unprecedented levels. In 1979 a major increase in the price of oil was to finally push the world economy over the edge of the abyss. Paper dollars reached all time lows nearly reaching 1000 to the ounce gold. Interest rates exceeded 21% and inflation was out of control. Only the collapse of 1929 exceeded the extremely high levels of unemployment that resulted from unprecedented numbers of corporate bankruptcies. Things finally reached a crescendo in late 1981. That Christmas was the bleakest I had ever seen; a five dollar toy was the big 'hit'. You remember the Rubic's cube. If we look back a few more years we find a situation that is almost as bad. It was around 1972 that President Richard Nixon (America) instituted wage and price controls in an attempt to control double digit inflation. Many other leaders around the world followed suit. It was market conditions (in 1973 the first of a series of huge increases in the price of oil shocked the world) more than anything else that controlled increasing inflation, although President Nixon took credit for the improved situation (a reduction in the increasing inflation). Almost immediately after controls were abolished inflation resumed reaching double digit levels. Many reacted by immediately raising prices (or demanding large wage settlements) largely out of fear that controls would be re-imposed shortly. I could go on and on and on, citing examples of inflation, financial panic and more. What I have yet to reveal is why there is inflation and all this other crap. All of the so-called reasons that are offer to explain inflation are in reality simply symptoms of a deeper underlying problem. What we need is to do is get to the root of the problem. First though we need to learn a bit about the evolution of our economic system. Money by Ian Green Page 4 EARLIER INFLATIONS EARLIER INFLATIONS For as long as there have been rulers there has been inflation. In archaic times it took the form of coins of slightly reduced purity or weight. Because early coins were not exactly uniform in shape, these inflated coins could circulate side by side with one of full weight and fineness. Other reasons for their success was that the difference was very slight; the coins were officially certified to be of full weight and purity, i.e. the guy in charge decreed they be accepted without question. It was also reasonable that the recipient could pass them on at par with full weigh/purity coins. As time moved on, coins would go through a cycle of replacement until some time later they were ultimately and intrinsically worthless. All the time however the value of the coins would erode and eventually no one would accept them in exchange at all. It was about this time that a change in management would occur. In medieval timers, it was customary for the goldsmiths to act as depositories for the safe-keeping of money (gold). When a client wanted his money he had to go down and get it, or at least take the guy he was doing business with down to witness the transfer of accounts. Once paper finally became readily available, it didn't take long for the goldsmiths to begin providing receipts for gold deposited. These could then be endorsed (not unlike today's checks) over to a third person to complete a transaction. This third person could then go and redeem the receipts and get the gold. Ultimately goldsmiths began offering 'bearer' receipts which were the earliest bank-notes (in the West anyway, the Chinese were way ahead of us by several centuries). Money by Ian Green Page 5 FRACTIONAL RESERVE BANKING FRACTIONAL RESERVE BANKING Goldsmiths, in issuing their receipts, came into direct competition with the guy in charge over the supply of money. Rather than abolish these receipts, some monarchs became intrigued by the fact that the masses preferred their goldsmith's paper over his often underweight and impure metal coins. It was also readily apparent that it was far easier to make counterfeit paper receipts for gold that could circulate along side legitimate receipts. Naturally under even the simplest of legals system, conning thine neighbor is not allowed, unless of course you are the one who makes the rules. Details are scarce but it is clear that some greedy king, along with the cooperation of a dishonest goldsmith, started the system of fractional reserve banking. The guy in charge would protect the goldsmith from anyone who complained in return for the goldsmith's financial backing. Using the old standby propaganda, both the goldsmith and the guy in charge would continually reassure the public that it was all right to have more receipts outstanding than there was gold because there would always be more than enough gold on hand to meet redemption demands. As long as those responsible didn't get too greedy, the erosion of value of the receipts was barely noticed (although people did eventually catch on). When things did get out of hand a 'run on the bank' would occur. Sometimes the goldsmith became 'bankrupt'; he could only pay out the 'fractional reserve'. The rest of the outstanding receipts were worthless (at last the counterfeits were flushed out, usually along with the counterfeiter). Sometimes the guy in charge foresaw the run and closed the goldsmith's shop before disaster struck. Needless to say that remaining receipts would decline in value rather precipitously. If he had 'connections', sometimes the king could borrow some money (gold) and re-open the goldsmith's shop and meet the rush head-first! Eventually people would see that the notes were being redeemed and would eventually refrain from redeeming their holdings. In fact these people would start bringing their gold back to the goldsmith's to get the newly acceptable receipts. A fool and his money are soon parted. I guess you can see the obvious. Once the situation cooled off it didn't take long for the guy in charge to start the old game again, all the while eroding the value of the receipts more and more. Eventually the whole thing would fall apart and once again a change in management usually occurred. Money by Ian Green Page 6 CROOKED CREDIT CROOKED CREDIT Not long after the abuse of paper receipts started, the practice moved over to the loans business. In earlier times the goldsmith 'loaned' money (gold) to certain customers for a small payment. Certain other customers provided gold on long term deposit for which they were paid a small amount. In the beginning it worked out well. Loans outstanding never exceeded deposits. A new method of book-keeping, known as the 'double entry' ledger system emerged. It was fair and accurate and it kept track of the goldsmith's business and everybody was happy. Later though goldsmiths would loan money that was in excess of the amount on deposit. In order to cover the discrepancy, a dishonest goldsmith would 'depositing' an equivalent amount to keep the books balanced. Needless to say such practices are completely and utterly fraudulent, but with the protection of the king what could be done? Although this kind of abuse is not readily visible, it did have an effect on the money supply and inflation continued to gnaw away the purchasing power of the receipts. Combined with counterfeit receipts, these fraudulent loans combined to destroy more economies that you can shake a stick at. It kind of makes you wonder what is next. What can be worse than counterfeit money? Money by Ian Green Page 7 FIAT MONEY FIAT MONEY Somewhat more recently the value of the world's currencies has moved to the logical extreme of the fractional reserve system. If you go down to a coin dealer and look at the historical bank-notes (American) you will notice the are marked 'silver certificate' or 'gold certificate' as at one time these were redeemable in precious metals. Coins were actually still made of precious metals. Genuine paper money is fully redeemable. Counterfeit paper carries the promise of redeemability (which the issuer knows is fraudulent). Paper money which doesn't carry even the promise of redeemability is even worse - it is a fiat money. Fiat money is what is left of the fractional reserve system gone broke. It is a money substitute that has no backing whatsoever. Dollars became fiat in August 1971 when President Nixon declared that the dollar would no longer be redeemed for gold (although in effect this was evident as early as 1968). In fact ALL currencies of ALL nations today are 100% irredeemable fiat money with NO TRUE BACKING whatsoever. Dollars have become increasingly worthless, yet curiously they have become redeemable again (albeit at a substantially reduced rate). You can now go and buy gold bullion one again (It used to be illegal to own gold bullion in America). The paper dollar has declined, is declining and will continue to decline relative to the gold dollar until eventually it is absolutely worthless. The path will be erratic but it is well established on its way down. Money by Ian Green Page 8 DEBT DEBT Finally we come to the debt problem. So far all those deficit dollars (yens, pounds, etc.) are increasing by leaps and bounds. Sooner or later this debt will have to be paid. The crucial question is how? Well if you took the American situation as an example the debt there is $3 trillion ($3,000,000,000,000.00) or so. If we simply printed it up and circulated the notes it would devalue the presently feeble dollar by at least 90%. Not to popular with all those holders of dollar denominated assets like bonds and treasury bills. So what else can be done. Well the supply of dollars can be increased more slowly but it has the same effect of depreciating the present value of the dollar. If we look at the Canadian situation, it is even worse. Here the debt is currently around $350,000,000,000.00 and only a small population of 25 million people to pay. Suffice it to say inflation is going to get worse because of the double whammy of counterfeiting and debt. A gloomy scenario but accurate. Worse is the fact that there is more to come. Another consequence of this debt is that it siphons up money there by removing it from the overall credit pool. This drives interest rates higher which in turn drive the deficit higher which drive interest rates high in a vicious cycle. In Canada, for example, the federal budget deficit stands in the $30-35 billion range. Curiously that figure is about what the interest payments are on the total debt. Any increase in interest rates simply raises the budget deficit which in turn drives the supply of dollars ever high. Consequently the debt simply feeds on itself growing uncontrollably. Another peculiar aspect of debt lies in America. It is variously known as the Savings and Loan crisis. When the industry was first created S & Ls were confined to financing housing. Deposits were all insured and the situation was stable (or so it seemed). As time moved on however increasing federal debt began to drain money from the private sector. S & Ls responded by raising the interest offered on deposits to maintain adequate reserves as required by law. The problem was that large amounts of money had previously been loaned out at comparatively low interest rates for long periods of time. Stuck with these low paying mortgages and spiralling interest rates it didn't take long before the whole industry to fall into turmoil. In a quick fix the American congress decided it was expedient to allow the S & L's to invest in higher yielding ventures to help improve their financial health. Unfortunately such a change in policy did nothing to ease the situation. As interest rates continued to climb more and more these alternate investments (mostly in commercial real estate) fell into bankruptcy and once again the industry was on the verge of total collapse. Only this time the situation was quickly becoming hopeless. What happened to exasperate the problem is nothing short of incredible. In a frenzy to maintain viability S & Ls started competing heavily to attract depositors to the point where Money by Ian Green Page 9 interest rates were becoming unrealistic compared to earnings. None of this mattered though because the deposits were all insured. This meant that savers could simply go to the S & L that paid the most, there was no risk so why not go to the highest bidder. The Federal Savings and Loan Insurance Corporation (FSLIC) was the one stuck to pay all this money. Once an S & L was bankrupt (most were well past that stage years ago) the entire burden fell upon the FSLIC. Estimates of the current amount needed to 'bail out' the industry range into the hundreds of billions of dollars. And still the congress has done nothing alleviate the problem. Shutting the industry down seems to be the only viable solution. It cannot continue to function the way it does now. One thing is certain the accumulating debt will have to be paid. In Canada the pension system is run on a pay as you go basis. Pension payments are paid from general government revenues. Unfortunately demographics will make this program very expensive for younger persons. The reason is simple, in Canada fully one third of the population is over the age of 50. In only 15 years the number of persons claiming a pension will skyrocket. The 'problem' of the declining birth rate is manifest. When this pension program was introduced decades ago, the number of persons that were eligible was relatively small. Advances in medical technology have however increased life expectancy of the average individual substantially. This results in ever increasing numbers of persons living long enough to collect a pension for longer periods of time. Unfortunately the pension plan has not been modified to reflect this fact. This unfunded liability is sure to drive up the debt as no government has the political will to deal with the problem. In Canada a deindexing (decoupling the program to inflation) was tried but the government rescinded the proposal after numerous protests. Instead one can expect that this liability will add to the already massive debt driving inflation to higher and higher levels. It is even possible that the pension plan may be phased out completely (because of bankruptcy). In America the national pension system is forced to invest in government securities which is effectively means the same situation as Canada's only disguised. In order to pay the pension the Federal government has to pay off some debt. But the debt continues to grow and grow. A paradox that must be corrected. Money by Ian Green Page 10 THE FUTURE THE FUTURE What I have described above is all true. Inflation has so eroded the dollar that it is now almost intrinsically worthless. On top of that is a huge supply of additional deficit dollars to further dilute the remaining value. Recently M2 (an index of the dollar supply) has been growing at an annual rate of some 15% (three times the official inflation rate) and no slowdown is likely. Where does it lead? It simply means that government policy continues towards the inflationist view. As I outlined in earlier chapters continued inflation in the money supply is sure to cause the ultimate downfall of an empire. Recently housing has become short in supply, a symptom of the high cost of money. The shortage drives prices up and up. If the cost of money wasn't so high then the housing supply could keep up with the ever increasing population. Construction of new homes is slowed when the cost of money rises. Worse, local governments are reluctant to provide building permits exacerbating the problem. Sooner or later, all of those deficit bills will have to stand up and be counted. You can be sure that inflation will run right through the roof when they do. Look at Argentina right now. It is in the hyperinflation stage right now. Prices are doubling ever day or two, the government is out to lunch (there were recently a change in management there, but the new president has nothing with which to rebuild the economy, inflation has eaten it all up). At times there were riots as people fought to get basic food (it has been priced out of reach by inflation). This will happen here, I just cannot say when. One things is clear, previous generations have been living beyond their means, and now the present and future generations are going to have to pay and pay and pay and pay and pay and pay. Money by Ian Green Page 11 SURVIVAL SURVIVAL I guess you kind of expected something of a survival guide to this dilemma and lucky for you there is a faint glimmer of hope. Basically put you have to change your mentality regarding the health of the economy. Instead of valuating assets in dollars (or whatever) use gold dollars or my personal favorite sovereigns (they are coins that contain .2354 ounces of fine gold each, made by the British Empire, they are still legal tender to this day). A sovereign is easily recognized by the image of a reigning King or Queen on one side and a scene of St. George slaying the dragon on the other. Now move to liquidate dollar denominated assets like T-bills certificates of deposit and the like and redeem them for gold and silver. Bulk coins (old silver dimes and quarters) are still around and these make a good vehicle for hold 'money'. Bulk silver is also nice (the troy pound is 12 ounces) as it weighs down the strongbox so that thieves (Break & Enter is very common crime) cannot just simply take it with them; it comes in a variety of convenient sizes ranging up to and including 1000 ounce bricks. Bulk gold is available in sizes ranging up to 400 ounces. Fractional sizes are also available. Precious metals rise in value as inflation rises. This is simply because gold cannot be artificially increased. Nature severely limits the amounts that can be mined each year to a minuscule fraction of the total world supply. Consequently they are extremely resistant to inflation. Another convenient aspect of gold is that it is recognized world wide. No hastles with paper money changers, gold buys goods and services everywhere. One last piece of advice, should a dealer ask your name when making a purchase do like I do, simply use a false name. This avoids attracting attention to yourself lest certain 'official' money grabbers try to put the grab on your 'money'. Money by Ian Green Page 12 THE AUTHOR THE AUTHOR I was born on September 10th, 1958 in the Grace Hospital (now known as the Children's Hospital). I was raised in New Westminster and attended a variety different schools because of the politics of divorce (that my parents undertook). Once I reached high school a degree of stability finally reigned and my academic abilities reached their peak in grade 11 when I was granted Academic Student of the Year. The prize was modest, a one year subscription to Scientific American. I graduated with honours in 1977. After completion of high school I was able to attend the University of British Columbia for one year. The only reason I was able to achieve this was simply because I won a scholarship to attend, my father would not assist me in any way (I even had to pay for most of my books and supplies). In 1978 I was unable to win another scholarship (as the economy faltered so did the supply of funds for education) so I was forced to enter the work force. My early years as a worker taught me a great deal about the realities of economics. I entered the work force just as the economy went to hell in a hand-basket. Still I was able to secure work if you consider working in toxic waste dumps work. Such is my lot I suppose. At least I could pronounce all the names of the chemicals I was cleaning up. Later in 1981 I got another job in a chemical factory, my lungs still bother me from the alkaline dust that permeated the air (mostly soda ash, but phosphates and more complicated organics were also present). Lately I have found myself working at poorly paid 'service sector' jobs. I manage to survive. Curiously I do better to indicate an inferior level of qualification than to present my full academic credentials. (I successfully challenged many courses at UBC and was taking one 3rd year math course all in my first year). Needless to say it makes me that much more cynical to see hordes of morons in places where they shouldn't be. My personal survival depends on you, because I don't have a steady job. If you can afford it why not send $5 or $10 to the address on the cover, I could sure use it. Keep your eyes open, I plan to publish many more essays as time moves on, both on the topics presented here as well as others. Perhaps if the venture works out I will be able to complete my academic goals. I was pursuing a program based on mathematics.