The Itsy Bitsy Spider

To say the least, the past month has been interesting. We have been treated to an amazing performance by our elected officials ending in the unthinkable, the first ever downgrade in U.S. debt. Or is it? Well, not quite. Remember the expression, “Not worth a Continental?” Our nation’s first currency was paper (fiat) money that was viewed as essentially worthless.

From Wikipedia, “By the end of 1778, Continentals retained from 1/5 to 1/7 of their face value. By 1780, the bills were worth 1/40th of face value. Congress attempted to reform the currency by removing the old bills from circulation and issuing new ones, without success. By May 1781, Continentals had become so worthless that they ceased to circulate as money. Franklin noted that the depreciation of the currency had, in effect, acted as a tax to pay for the war. In the 1790s, after the ratification of the United States Constitution, Continentals could be exchanged for treasury bonds at 1% of face value.”

During the Civil War the United States Government issued “greenback dollars” that were backed by nothing. Literally, there was nothing printed on the back of these bills. This currency gave rise to the expression, “not worth a greenback dollar,” to describe a particularly worthless person or thing. The Government defaulted on this currency in 1862, refusing to redeem the dollars in gold. The value of a greenback dropped to about 40 cents on the dollar.

During World War I the United States issued Liberty Bonds denominated in gold. When it came time to pay up, Franklin Roosevelt had made it illegal for private citizens to own gold, in effect defaulting on this loan. The entire sad story of the Liberty Bonds is too complicated for this blog, but makes for an interesting read if you enjoy history.

Depending on whom you choose to believe the debt crisis trigged by peripheral states of Europe, the so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) is worse (or not) than our predicament. Japan is facing a national debt of 200% GDP. The Chinese government is losing control of inflation in their economy. The Australian government is dealing with a real estate bubble very similar to the one that started our recent recession.

The stock market reacted to all this good news by dropping over 6.5% in one week! So what can we do? The market is down about10.5% since its most recent peak. At some point stocks and bonds will once again be a bargain and the wise investor will be buying equities. There are no guarantees in life, but the odds are in your favor if you keep doing the right things in the right way. The sun will come out again, it will dry out all the rain, and Lord willin’ we will climb that spout again.

The itsy-bitsy spider
Climbed up the water spout
Down came the rain
And washed the spider out
Out came the sun
And dried up all the rain
And the itsy-bitsy spider
Climbed up the spout again