The Nature of Money

For some reason there seems to be a lot of chatter on the Internet financial pages about the nature of money. What is it? Here is my take on what I have read. Money is anything you want it to be. Money is just a device created by a society to facilitate transactions. It can be Yap stones, wampum beads, clam shells, pieces of paper, or even something as ethereal as electrons lighting the pixels on video screen. The key is belief. Everyone has to agree that Yap stones or a particular piece of paper is a window. As a member of this society, as I look through the particular window called American Dollars I see a new BMW, a vacation in Hawaii, or lunch at McDonalds. Money is ultimately based on something, most often gold or silver. Nixon cut us loose from the gold standard back in 1971. If I remember correctly, the French made a run at the American gold reserve with their stack of dollars. It was dangerously destabilizing. Nixon cut off that nonsense at the knees.

So what is the base of the American dollar? It is nothing but debt. The reality is probably more complex than can be contained in a 500 page book but here is the essence. The American government creates money by creating a debt when the Treasury Department issues a bond. This bond is sold through the Federal Reserve Bank to “primary dealers” who must make bids on this debt through an auction process. Who are these guys? “For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.” (From Wikipedia) Check into high ranking political appointees from both parties and compare their resumes to the list in the last sentence.

Then through the magic of fractional reserve banking, a dollar of debt becomes the basis of a loan that creates more debt. There are mathematical formulas that predict the outcome of such activities based on the amount of money the regulators require the banks to hold. A 10% reserve turns one dollar into nine dollars. If this was being done by someone other than the government it would constitute fraud.

Money is also a commodity that is traded for other commodities. Its value rises and falls over time depending on the supply of money compared to the supply of the goods and services. If the Federal Reserve System and the Government create too much money, its value relative to a gallon of gas drops. It pleases us to call this inflation. In the worst case scenario, the value of the currency drops to zero since it based on nothing but a government promise to pay its debt with interest. This happens fairly often, most recently in Zimbabwe. If the Federal Reserve System creates too few dollars (an unlikely scenario) the value of the dollar increases relative to the supply of goods and services causing deflation. In a worst case scenario this leads to an economic collapse as wages, prices, and profits all decline to nothing. That is happening in this country, today. Trillions and trillions of bad derivative debt has disappeared. The government is doing everything it possibly can to replace that bad debt with new debt that ultimately owed by the American taxpayer to the bond holders, such as the Chinese.

Always, even before there were the economic philosophies we call capitalism and socialism, at some point too many promises to repay some debt or obligations (such as my pension) were made by the powers that be. There simply was not enough gold or potential tax revenue to redeem all these promises, people no longer believed, and the whole edifice came crashing down. Today we live in a castle of debt built on a foundation of thin air. It will unravel in some manner at some point in time. I am just not smart enough to know how or when. Capitalism is based on greed. Socialism is based on envy. Greed and envy are two of the seven deadly sins, but Jesus transcends economic systems. There are wheels within wheels both in the earth and in the powers of the aire, but there are also wheels within wheels in Heavenly places.

Ezekiel 1

[14] And the living creatures ran and returned as the appearance of a flash of lightning.
[15] Now as I beheld the living creatures, behold one wheel upon the earth by the living creatures, with his four faces.
[16] The appearance of the wheels and their work was like unto the colour of a beryl: and they four had one likeness: and their appearance and their work was as it were a wheel in the middle of a wheel.
[17] When they went, they went upon their four sides: and they turned not when they went.
[18] As for their rings, they were so high that they were dreadful; and their rings were full of eyes round about them four.
[19] And when the living creatures went, the wheels went by them: and when the living creatures were lifted up from the earth, the wheels were lifted up.
[20] Whithersoever the spirit was to go, they went, thither was their spirit to go; and the wheels were lifted up over against them: for the spirit of the living creature was in the wheels.
[21] When those went, these went; and when those stood, these stood; and when those were lifted up from the earth, the wheels were lifted up over against them: for the spirit of the living creature was in the wheels.
[22] And the likeness of the firmament upon the heads of the living creature was as the colour of the terrible crystal, stretched forth over their heads above.
[23] And under the firmament were their wings straight, the one toward the other: every one had two, which covered on this side, and every one had two, which covered on that side, their bodies.
[24] And when they went, I heard the noise of their wings, like the noise of great waters, as the voice of the Almighty, the voice of speech, as the noise of an host: when they stood, they let down their wings.